22 January 2020
The large supply of yuan is a key factor behind the Chinese currency’s softness in recent years. Photo: China  Daily
The large supply of yuan is a key factor behind the Chinese currency’s softness in recent years. Photo: China Daily

Aside from a strong dollar, what else is keeping the yuan weak?

The overnight Hong Kong Interbank Offered Rate for offshore yuan, or CNH Hibor, spiked to 17.75 percent on Tuesday, the first trading session of the new year.

That’s close to the peak of 20 percent in September last year.

The one- to two-week CNH Hibor also soared to 14 percent, while the one-month rate rallied to 13 percent.

Besides tight liquidity, the CNH Hibor was also driven up by the deleveraging of China’s banking system amid the economic downturn and rising credit risk (as reflected in a series of debt default cases).

Rising CNH Hibor rate and tight liquidity in the mainland market prompted numerous banks in Hong Kong to raise their yuan deposit rate to as high as 5 percent (for six-month fixed deposits).

In the meantime, analysts remain generally bearish on the yuan for the next one to two years.

Some are even predicting that the yuan could tumble to 7.8 against the US currency, which means parity with the Hong Kong dollar.

The popular explanation for the renminbi’s weakness is the strong dollar. But is this true?

A surging greenback is perhaps part of the reason, but equally important is the massive amount of yuan supply.

China’s M2, a broad measure of money supply, more than tripled to 153 trillion yuan (US$22.23 trillion) in November last year, from 47.5 trillion yuan in 2008.

China’s money supply has been expanding at over 12 percent per annum, while the nation’s GDP growth is around 6.5 percent, creating an excessive pool of liquidity.

This has been putting pressure on the renminbi, in addition to the dollar uptrend.

This situation of having too much yuan supply looks unlikely to reverse in the next couple of years.

I also believe the yuan won’t be able to defend the key level of 7 against the greenback for long.

Notwithstanding the negative prospect for the yuan, the high interest rate is going to prevent any panic selling, as long as the fall is expected to happen gradually and slowly, at about 3-5 percent clip per annum.

Whenever the yuan is under extreme pressure, China’s central bank typically controls offshore market liquidity to drive up interest rates, thus increasing the cost for short-sellers.

That has worked quite well and will probably continue to keep the yuan decline in an orderly fashion.

This article appeared in the Hong Kong Economic Journal on Jan. 5

Translation by Julie Zhu

[Chinese version 中文版]

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head of private banking and trust services at Hang Seng Bank