Hong Kong's overnight yuan borrowing rate set at highest in 8 months

Hong Kong's overnight yuan borrowing rate was fixed at the highest level in eight months on Monday after the long holiday weekend.

China's financial markets were closed from Thursday for the Mid-Autumn Festival, and Hong Kong's markets were shut on Friday.

The CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor), set by the city's Treasury Markets Association (TMA), was fixed at 23.683 percent for overnight contracts, the highest level since Jan. 12.

Traders said the elevated offshore yuan borrowing rates in the past week were due to tight liquidity in the market and rumors that China took action to raise the cost of shorting its currency.

An employee counts 100-yuan banknotes at a bank in Lianyungang, China.
STR | AFP | Getty Images

"Normal lenders of the yuan, like Chinese banks, have refrained from injecting liquidity into the market recently due to speculation that the yuan will depreciate toward certain levels like 6.68, 6.7 per dollar," said a trader in a local bank in Hong Kong.

"(The yuan's) inclusion into the SDR basket nears, so the central bank would like to maintain the offshore yuan near the stronger side," said the trader, adding that seasonal reasons including national holidays and caution near the quarter-end also drains yuan liquidity from the market.

The U.S. dollar traded near a two-week high against a basket of major currencies on Monday after U.S. consumer prices rose more than expected in August, bolstering expectations the Federal Reserve will raise interest rates this year.

Market players expected yuan borrowing rates to remain volatile in the coming weeks due to a number of big events such as the outcome of the Fed's policy meeting this week.