The spread between the yuan’s rates at home and overseas has hit its widest point since February leading many to worry that the People’s Bank of China will take action to narrow the gap.

Late Wednesday, as the onshore yuan surged against a declining dollar, the difference between the two rates climbed to 0.6%, or 394 so-called pips. The Shanghai rate leapt 0.41%, compared to the 0.14% advance in the offshore currency. By 5:14 am Thursday, the offshore yuan had fallen 0.24% to 6.5436 a dollar, while the onshore rate dropped 0.32% to 6.5127.

The spread exists because China restricts cross-border capital flows and gives speculators a way to make money by buying the currency in Hong Kong and selling it in Shanghai. This has been going on since the yuan’s devaluation in August last year.

The central bank has been trying drive out speculators who take advantage of the market mismatch with little success.

The central bank raised the yuan’s daily reference rate by 0.38% on Thursday, the most in two weeks, after a gauge of dollar strength retreated 0.4% overnight. The greenback rallied on Thursday, extending this month’s gains to 1.6%.

A Bloomberg replica of the CFETS RMB Index, which the PBOC uses to track the yuan against 13 currencies, rose for the seventh straight day, the longest run of gains since the gauge was introduced in December.

“The index rose because of broad dollar strength — components in the basket are weakening against the greenback faster than the yuan is,” Gao Qi, a strategist at Scotiabank in Hong Kong told Bloomberg.

Leave a comment