07/13/2015
China / Rates
Stabilising stock market sentiment in China has helped to push down elevated offshore Chinese yuan interest rates.
Stabilising stock market sentiment has helped to push down elevated offshore Chinese yuan interest rates over the past few trading days. Since the Shanghai Composite Index’s July 8 closing low of 3,507, it has rebounded by 14%, closing at 3,924 on Tuesday. Concomitantly, weakening pressure (as represented by trajectories in the 12-month US dollar/onshore yuan non-deliverable forward) on the yuan has fallen, thereby allowing the six-month implied offshore yuan Hang Seng interbank offered rate (Hibor) to dip back below 3%.
Notably, the six-month implied offshore yuan Hibor is back below the six-month Shanghai interbank offered rate. Re-convergence of short-term onshore and offshore yuan rates has occurred. Meanwhile, the spread of the five-year onshore yuan swap rate over the five-year offshore yuan cross currency swap rate has also narrowed.
Risks of further stock market volatility in the near term, with consequential spillover into the rates space, cannot be discounted. While the authorities have already announced unprecedented supportive measures, hundreds of Chinese stocks remain halted. As these stocks resume trading, gyrations in the stock market are likely. Over the medium-term, however, longer-term onshore yuan rates are likely to rise, pricing in better growth/inflation expectations and an increase in municipal bonds. Accordingly, offshore yuan rates are also likely to follow suit, especially if expectations of yuan appreciation remain muted.
