The yuan-based Hong Kong Interbank Offered Rate (yuan-HIBOR) is on the rise again. Today it rose for the sixth consecutive trading day and jumped by 5.2 percent to trade at 12.4 percent. In the previous week, it rose by 5.8 percent. This is the third major jump this year. It first came under the international spotlight, when the overnight rate reached a record-high of 66.8 percent as the People’s Bank of China (PBoC) drained liquidity via state-owned banks to discourage the short-selling of the yuan against the dollar. Then back in September, the rate rose to 23 percent, second highest on record. We would keep a close watch to see, how high the rates go this time around. The yuan is currently trading at 6.89 per dollar and it is likely that the rates would rise further towards 7 per dollar.

As the US Federal Reserve prepare to hike interest rates again, there is an ongoing tension surrounding funding. The liquidity is tight in China and it might be contributing to the rise in HIBOR. The liquidity is tight in other Asian countries too. The cost to convert yen liabilities into the dollar, using basis swap has reached the highest level since the global crisis of 2008/09.