WSJ:Scramble For Dollar Causes Sell-Off In Offshore Yuan
By LINGLING WEI
BEIJING--A scramble for U.S. dollar funds by investors world-wide caused a big sell-off in the offshore Chinese currency Friday, leading it to trade at the widest-ever discount to its mainland counterpart.
Yuan traded in Hong Kong changed hands at a discount of as much as 2.5% to its onshore counterpart in early trading, the widest discount since the Chinese government relaxed its currency rules a year ago and put in measures aimed at encouraging the use and trading of yuan outside its borders.
The spread narrowed through the day but stayed high by historical standards. Dollars were trading for 6.3935 yuan in the onshore market and 6.4925 in the Hong Kong market, meaning offshore yuan was trading at a discount of around 1.5% to its onshore counterpart.
Hong Kong, which is under Chinese sovereignty but has its own legal and financial systems, is currently the only offshore yuan-trading hub. Unlike on the mainland where capital controls are in effect and where Beijing limits the range for the currency pair to trade, investors can buy and sell the currency freely in Hong Kong.
The big spread between yuan traded offshore and onshore is due to "investors sourcing U.S. dollar funds" by selling yuan in offshore markets against the greenback, said Tim Condon, Singapore-based chief Asia economist with ING Groep NV.
Until now, global investors have largely adopted a strategy of shorting the greenback for the redback on expectations that Beijing would continue to allow its currency to rise in value. In fact, the ever-growing desire for yuan offshore has caused the Chinese currency traded in Hong Kong to boast a premium over its mainland counterpart at most times.
Now, however, growing fears of an economic recession around the globe and a Greek debt default are driving investors back into the relatively safety of the U.S. dollar, leading many investors to sell yuan and other currencies for dollar.
Still, many analysts don't expect the gap between yuan traded onshore and offshore to last for long, partly because the potential arbitrage opportunities resulting from such a spread could lead to more speculative trading in yuan, something loathed by the Chinese government.
Beijing has tried to maintain a narrow spread between offshore and onshore yuan to limit such arbitrage opportunities, analysts say.
If the spread persists, Mr. Condon said, "all the big Chinese banks with operations in Hong Kong could just take the other side of the trade" and sell dollars against yuan offshore.
So far, however, Beijing hasn't shown signs of putting in any measures aimed at reducing the gap, traders said.
