China has requested banks to restrict certain Connect bond outflows, according to sources.
China’s Central Bank Takes Action to Support Yuan
The People’s Bank of China (PBOC) has instructed domestic banks to reduce their outward investments through the Bond Connect scheme, according to sources familiar with the matter. This move is part of a series of measures aimed at bolstering the Chinese yuan. The guidance from the PBOC appears to be aimed at limiting the supply of yuan in offshore markets and containing yuan flows into Hong Kong.
This latest directive from the PBOC comes as China’s financial markets experience losses and heavy outflows. Ken Cheung, chief Asian FX strategist at Mizuho Bank, believes that the guidance could reduce mainland capital outflows through the bond market and drive offshore yuan yields higher to support the renminbi.
The Bond Connect scheme, which has been in operation for two years, allows mainland institutional investors to purchase bonds traded in Hong Kong. One of the sources suggests that restricting yuan from flowing to the offshore market could tighten offshore yuan liquidity and raise financing costs, potentially striking against foreign yuan bears.
China has been implementing various measures to defend its currency, which has been weakened by a sluggish economy and capital outflows. The yuan has depreciated about 5% against the dollar this year, reaching a 10-month low last week. However, it has since strengthened to trade at 7.2865 per dollar on Friday.
Among the measures taken to raise the cost of shorting the yuan offshore, China’s state-owned banks have been mopping up cash from the market and engaging in sell/buy swaps in the forwards market to absorb offshore yuan. Additionally, the PBOC has been urging banks to stop subscribing to Negotiable Certificates of Deposit (NCDs) issued by offshore banks, further curtailing the amount of yuan in Hong Kong markets.
The PBOC has not commented on the content of the window guidance, and the sources spoke on condition of anonymity as they were not authorized to talk to the media.
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