Yuan Surges Against Dollar as China Tightens Capital Control

China’s yuan surged against the U.S. dollar for a second day as Chinese authorities’ efforts to stem capital outflows are beginning to pay off.

In Hong Kong, the offshore yuan rose 1.1 percent to 6.7869 against the U.S. dollar on Thursday, poised for its biggest two-days gain since 2010. This marked its second consecutive day of sharp gained. In the onshore market, where the currency movements are limited by the People’s Bank of China, rose 0.6 percent.

In mainland China, the central bank will set a mid-point of yuan against the dollar every day and the currency is limited to move 2 percent above or below the mid point. While in Hong Kong, the yuan can be traded freely since 2010.

The surges of yuan came after Chinese policymakers’ efforts to control capital outflow and dollar weakened after Fed minutes signaled uncertainty about interest rate under President-elect Donald Trump’s policies.

“Given the recent capital controls, the channels for domestic institutions and retails to bring out onshore cash to the offshore market have also been tightened,” said Becky Liu, a rates strategist in Hong Kong at Standard Chartered Plc. “There is a lack of supply of yuan liquidity.”

The cost of borrowing yuan in Hong Kong surged. Overnight Hibor for the offshore yuan rose to 38.3 percent on Thursday, up from 17.76 percent on Tuesday and 16.95 percent on Wednesday. That’s the most since the cost of borrowing hit a record high of 66.8 percent in Jan. 12, 2016.

“We know the capital controls aren’t working because that’s why they’re having to raise the overnight deposit rate so aggressively by the PBOC, which is still basically the guiding hand in the offshore yuan market,” said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. “It’s an incredibly aggressive tactic.”

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