Despite increased volatility in the yuan’s exchange rate, the State Administration of Foreign Exchange still plays a visible role in steering the yuan’s external value. In the markets, exchange rate expectations are influenced by the spread between the offshore yuan rate quoted in Hong Kong (CNH) and the mainland China onshore yuan rate (CNY).
The PBoC this week issued its first yuan-denominated bonds in Hong Kong. The new instruments offer the possibility to directly influence yuan liquidity in the special administrative region and thereby the CNH rate. Previously, the PBoC apparently relied on large state-owned banks operating in the region to adjust CNH liquidity and steer the exchange rate. The market players hope that the central bank bonds will provide transparency in the key yuan offshore market. Additionally, they may offer a new reference rate for yuan-denominated financial products outside mainland China.
Yuan-dollar exchange rate in Shanghai and Hong Kong