Bank adjustments, normal market activities seen causing drop
The lending rate for offshore yuan trading in Hong Kong plunged Thursday, falling into negative territory for the first time since it was launched in 2013.
Normal market activities and end-of-quarter strategic adjustments by banks contributed to the drop, experts said, noting that this will not change the fundamentals for the yuan, which has rallied against the U.S. dollar recently.
The Hong Kong Overnight Interbank Offered Rate (HIBOR) for offshore yuan, a key lending rate submitted daily by Hong Kong banks for reference to traders, fell to -3.725 percent, the lowest level on record, Reuters reported Thursday.
Overnight implied deposit rates for offshore yuan also saw the largest decline on record, falling to below -16 percent, having even reached -27 percent at one point, according to Reuters.
Normal market activities
"This single-day drop in the rate was likely caused by normal market activities," Tan Yalin, dean of the China Foreign Investment Research Institute, told the Global Times on Thursday.
A rare bond default by a State-owned securities brokerage might also have had a "negative impact" on the mood of the foreign exchange market, Tan said.
The Hong Kong branch of mainland brokerage firm Guosen Securities has defaulted on its "dim sum" bonds traded in the city, putting a coupon payment of 38 million yuan ($5.9 million) at risk, the Financial Times (FT) reported on Thursday.
Technical defaults by Chinese State-owned enterprises are rare, and Guosen's default on Thursday defied creditors' assumptions that the parent company would always stand behind its subsidiary, the FT report said, citing analysts.
Such assumptions might not be accurate and Guosen's default is a "normal" market activity that could not have been avoided, Tan said.
"But nonetheless, the default definitely hurt investors' confidence and might have contributed to the HIBOR slide," Tan noted.
Another factor behind the drop might have been end-of-quarter strategic adjustments by banks, Huang Jianzhong, a professor at the Business School of Shanghai Normal University, said in a note sent to the Global Times on Thursday.
Thursday was the last day of the first quarter of 2016, and the amount of money banks are required to hold as reserves for the second quarter is based on their yuan holdings at the end of the quarter, so some banks might have tried to trade out yuan to avoid large reserve requirements, domestic news portal sina.com reported on Thursday, citing analysts at Standard Chartered PLC.
"Financial institutions' willingness to reduce [yuan] holdings was one of the reasons behind the HIBOR drop," Huang said.
Weakening U.S. dollar a factor
The recent weakening in the U.S. dollar probably also influenced the HIBOR rate, Tan said.
The dollar's weakening has seen the yuan strengthen against it, which led to a large amount of capital pouring into Hong Kong, Tan said, adding that this capital influx caused "excess liquidity" that dragged the HIBOR down.
The offshore yuan exchange rate has strengthened 1.47 percent against the dollar in the first quarter, the largest gain since the last three months of 2011, according to Bloomberg. Tan said the gain was largely down to the weakening U.S. dollar.
However, the fundamentals of economies in China and abroad have not changed, and Thursday's HIBOR drop won't affect the overall trend of the yuan against the dollar, experts noted.
"I think the yuan won't fluctuate significantly - it will remain basically stable," Tan said. "But the appreciation of the yuan is limited and it is more likely to depreciate against the dollar."
