PBOC sells more yuan bills in Hong Kong, tempers downward yuan pressure

BEIJING/SHANGHAI: China's central bank sold some yuan bills in Hong Kong at a record-high coupon rate on Tuesday, driven up by liquidity tightness in Asia's key financial hub at a time the Chinese authorities are stepping up efforts to stem rapid yuan declines.

The People's Bank of China (PBOC) sold 15 billion yuan ($2.06 billion) worth of six-month yuan-denominated bills in Hong Kong at 3.38%, the Hong Kong Monetary Authority (HKMA) said in a statement.

The coupon rate of the six-month tranche was the highest since the People's Bank of China (PBOC) started selling offshore yuan bills in 2018. It was also 114 basis points higher than the previous such auction, which was priced at 2.24% in June.

The surging coupon rate comes as China's central bank has ramped up bill sales for a second straight month in Hong Kong, a move seen by traders as a way of soaking-up yuan liquidity to make it more expensive to short the yuan.

Sources told Reuters that China's major state-owned banks were seen mopping up yuan liquidity in the offshore foreign exchange market earlier this month.

"It is getting more expensive for traders to borrow yuan in the offshore market in Hong Kong and sell it against the dollar," Commerzbank economists said in a note.

Tuesday's offering tripled the amount of those maturing, as 5 billion yuan worth of such bills was set to expire.

The PBOC has usually conducted a flat rollover by auctioning the same amount of bills as those maturing.

The central bank's actions also come as cash conditions in the offshore yuan market have shown signs of tightness over the past few weeks, traders and analysts said.

"This is in line with higher yuan borrowing cost in Hong Kong," said a currency trader a foreign bank, which effectively erodes the carry advantage of the Chinese currency.

Hong Kong's offshore yuan CNH HIBOR, a gauge that measures the offshore yuan liquidity conditions, has been elevated over the past few weeks.

Six-month CNH HIBOR stood at 4.03970% on Tuesday, the highest level since Dec 2018. ($1 = 7.2944 Chinese yuan) - Reuters

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