The hand of the state has been speculated to be behind a rally in China’s financial markets since Moody’s said May 24 the nation’s efforts to cut leverage would be insufficient to curb debt. On Friday, China said it’s considering changes to the way it calculates the yuan’s daily reference rate against the dollar, a move that’s likely to reduce exchange-rate volatility while undermining efforts to increase the role of market forces in Asia’s largest economy.
“The sharp gain in the offshore yuan is partially due to the unwinding of short yuan positions because the high offshore yuan funding cost has made the currency too expensive to short,” said Stephen Innes, a senior Asia-Pacific currency trader at Oanda Corp. in Singapore. “Bears with short yuan positions would need to cut their exposure.”
The overnight yuan interbank rate in Hong Kong, known as Hibor, surged 15.7 percentage points on Wednesday to 21.08 percent, the highest since Jan. 6, while the offshore yuan’s overnight deposit rate jumped to 60 percent.
The increase in yuan funding costs is an increasing signal that authorities are intervening, said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. Officials may be reacting to prevent a negative reaction from Moody’s downgrade, he said.
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