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PBoC terminates some onshore commercial banks' cross border lending, CNH liquidity tightens

USD/CNH one year swap points rose 1900pips today, over 1500pips last week. There is liquidity tightening seen in the offshore market. 

This is because of Further weakness expected in CNH by the market, lowering the interest on CNH and the lending to offshore banks reduced by onshore commercial banks via bond repo.

PBoC has rejected few onshore banks' cross border lending, but it is said as a short term measure. PBoC might intend to raise carry cost of CNH shorts. FX swap point also rises up firmly, increasing cost to corporate hedging and exacerbate their balance sheets.

"We see that China's central bank will provide liquidity when necessary to manage the market liquidity and expectations. On policy side, we see that PBoC will still safeguard its currency especially even after SDR decision on Monday", says Commerzbank in a research note. 

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