Interbank renminbi lending rates rocketed to record highs in Hong Kong on Monday as suspected intervention by the People's Bank of China (PBOC) drained offshore liquidity.

Banks said they saw a weaker and more volatile mainland currency this year.

Benchmark rates for yuan loans set new highs on Monday in the SAR, with overnight and one-week fixing rates surging by the most since the Treasury Markets Association started compiling records in June 2013.

The overnight CNH (offshore yuan) Hong Kong interbank offered rate soared 9.39 percentage points to 13.4 percent, whereas the one-week fixing rate jumped 4.17 percentage points to 11.23 percent. The previous highs were 9.45 percent and 10.1 percent, respectively.

"Yuan liquidity is extremely tight in the offshore market due to suspected PBOC direct intervention last week. The effect of the central bank's potential action only shows today, which is a settlement day," said Becky Liu, senior Asia rates strategist at Standard Chartered Bank, adding that the floating rate for overnight yuan loans hit 25 percent as at 4:44 pm in Hong Kong.

"We expect tight yuan liquidity to remain for some time in the offshore market. As expectations of further yuan depreciation persist, the PBOC may continue to tighten capital-account control and buy more yuan in the offshore market when it weakens sharply," she said.

The CNH was traded at 6.6124 yuan per US dollar as of 8:17 pm on Monday, up more than 1 percent, while the yuan closed at 6.5822 onshore.

Apart from buying CNH, Liu said the PBOC has been increasingly leaning on offshore liquidity control by blocking cross-border funds flow channels to defend the currency.

The PBOC has blocked some foreign banks from settling offshore clients' yuan transactions in the onshore market until March this year, Reuters reported on Dec 29. The news came as the spread between the onshore and offshore yuan exchange rates widened to a record high of 1,600 pips on Jan 6. China's foreign exchange reserves fell $108 billion in December - the biggest monthly lost ever.

Meanwhile, demand for the greenback is on the rise on the mainland, as mainland dwellers' annual conversion quota of $50,000 is renewed in 2016. The central bank is said to be cooling the enthusiasm by forbidding commercial banks to sell more US dollars in January than in December.

On Monday, Goldman Sachs revised its year-end target for the onshore renminbi to 7 yuan per US dollar from 6.6, while expecting the redback to soften to 7.3 by late next year.

China Foreign Exchange Trade System released on Monday that its RMB Index, against a trade-weighted basket of currencies, closed at 99.96 last Friday, flat compared with end 2014.

emmadai@chinadailyhk.com

Banks say they see a weaker and more volatile offshore yuan this year and, thus, the People's Bank of China may further tighten capital-account control and buy more yuan in the offshore market when it weakens sharply. Petar Kujundzic / Reuters

(HK Edition 01/12/2016 page9)