The overnight CNH-Hibor rate has finally plummeted after two record highs, suggesting the People’s Bank of China feels it has made its point to investors and things can now return to normal.
The rate is the overnight borrowing cost, between banks, for offshore renminbi, chiefly in Hong Kong. It’s not too widely cited but this week took on massive importance when it spiked, first jumping 939 basis points to a record-high 13.4 per cent on Monday, and then sky-rocketing to 67 per cent on Tuesday. Today it returned to 8.31 per cent, which is still more than double the six-month average of 3.82 per cent.
The sharp increase indicated the market for CNH, or offshore renminbi, had dried up as the central bank mopped up liquidity to narrow the widening gap between the renminbi’s offshore and onshore rates. By heavily reducing the supply of CNH, shorting the renminbi – which involves borrowing the currency at market rates – became prohibitively expensive.