Cost of Borrowing Yuan in HK Surges as Currency Rises Against the Dollar

The People’s Bank of China on Thursday instructed the nation’s banks to withhold funds from other banks, driving the yuan in offshore trading to its highest level since early November.

The yuan rose 1.2% on Thursday to 6.7883 against the dollar in offshore trading. The currency has strengthened 2.5% over the past two sessions.

The move has made the cost of borrowing yuan in Hong Kong surge, reports the Wall Street Journal. The rate that banks charge each other in Hong Kong’s overnight lending market leapt from 17% to 38%, the highest in a year.

The Wall Street Journal reports that analysts and investors attributed the swings to factors including the central bank’s desire to punish short sellers by pushing up the cost of betting that the yuan will fall, a position that has become increasingly popular in markets as China’s growth slows and its debt burden rises.

“The PBOC is again sending a strong signal to markets that the yuan’s value remains under its control and that it will forcefully resist any one-way bets developing against the currency,” Eswar Prasad, a professor at Cornell University and a former head of the International Monetary Fund’s China division, told the Journal.

The central bank’s actions prompted investors to sell many investments that have been popular and buy ones recently out of favor, according to the Journal. The Dow industrials dropped 43 points to 19899 and the yield on the 10-year U.S. Treasury note fell 0.08 percentage point to 2.37%, while the dollar declined against the euro and yen.

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