China’s offshore RMB market basically froze today, with implied overnight funding rates rising over 20% and 3-month CNH cross-currency swap rates hitting all-time highs above 8%. The liquidity tension reflects the results of aggressive PBOC intervention this morning via commercial banks to narrow the spread between offshore and onshore spot rates.
The PBOC faces an inherent tension between its two objectives in the offshore market: keeping the CNH market alive and functioning consistent with the political objective to push internationalization of the yuan, while at the same time defending the currency. Yet the tightening of offshore liquidity conditions also potentially reflects a path out of the PBOC’s dilemma, should the currency weaken sufficiently to incentivize a resumption of the carry trade despite fragile liquidity conditions.
