Offshore Yuan Borrowing Cost Hits Record 1.44% Low Amid Liquidity Flood

The one-month offshore yuan Hong Kong Interbank Offered Rate plunged to 1.4397 percent on Friday, its lowest level since records began in 2013, reflecting a surge in CNH liquidity that analysts attribute to China's currency internationalization efforts. The historic low suggests that even recent government bond sales have failed to soak up the excess cash in the system.

"The ample liquidity in the offshore yuan market and likely still decent interest from investors via the Southbound Bond Connect... have likely buoyed the strong demand for the CNH Chinese government bonds, despite the larger issuance size," said Jeffrey Zhang, a strategist at Credit Agricole CIB in Hong Kong.

The record low in the one-month tenor is part of a broader trend. This week, the three-month Hibor also set a new record low, while one-week and two-week rates touched their lowest levels since August 2025. The weakness in borrowing costs comes after China’s finance ministry sold 15.5 billion yuan of government bonds in Hong Kong, with the two-year note pricing at a record-low yield of 1.32 percent.

This persistent abundance of cheap offshore yuan could encourage carry trades and potentially exert downward pressure on the currency's exchange rate. The dynamic showcases a deliberate policy choice by Beijing to foster a deep, liquid offshore CNH market as a crucial step in promoting the yuan’s use for global trade and investment, even if it introduces new management complexities for the People's Bank of China.

Bond Sales Absorb Little Liquidity

China’s largest yuan bond sale in Hong Kong since 2023 did little to drain the pool of liquidity. The finance ministry’s 15.5 billion yuan (RM8.99 billion) issuance on Wednesday was met with strong demand, pushing yields to historic lows. The two-year debt was sold at a yield of 1.32 percent and the 15-year security at 2.08 percent, both records.

"Yields are mostly in line with expectations, which were lower than at previous auctions as onshore yields had fallen," said Frances Cheung, head of foreign exchange and rates strategy at Oversea-Chinese Banking Corp in Singapore. She noted that the two-year yield compares favorably to its onshore counterpart, suggesting strong investor appetite.

Widespread Rate Collapse Signals Deep Liquidity

The fall in the one-month rate is not an isolated event but the culmination of a broader decline across tenors, indicating systemic liquidity depth. The overnight CNH Hibor recently fell to 1.23212 percent, its lowest since April 1, according to Golden Ten Data. Concurrently, the one-week and two-week tenors dropped to 1.35909 percent and 1.37576 percent, respectively, both marking nearly nine-month lows. The one-year Hibor has also edged down to a new historical low of 1.73515 percent.

The ample supply of offshore yuan is a key pillar in Beijing's long-term strategy to increase the currency's global usage. By ensuring the CNH market is deep and borrowing costs are low, it encourages international entities to hold, trade, and settle in yuan. However, the resulting low-rate environment presents a challenge for the PBoC, which must balance its internationalization goals against the need to maintain a stable exchange rate and prevent excessive speculation against the yuan.

This article is for informational purposes only and does not constitute investment advice.