As the year 2025 dawns, a significant trend is emerging in the CNH HIBOR, showcasing unprecedented highsAccording to data released by Gelonghui on January 7, rates across various maturity periods of the CNH HIBOR are climbingNotably, the overnight HIBOR skyrocketed by an astonishing 218 basis points, reaching 8.10273%—the highest since June 30, 2021. Meanwhile, one-week rates soared by 18 basis points to 4.81955%, marking a peak not seen since November 20, 2024; two-week rates crept up by 17 basis points to 4.70879%, hitting the highest point since April 22 of the previous year; and the one-year HIBOR increased by 10 basis points to 2.90000%.

Understanding CNH HIBOR

The CNH HIBOR, or the Hong Kong InterBank Offered Rate for offshore Renminbi, first introduced by the Hong Kong Treasury Markets Association in June 2013, serves as a pivotal benchmark for measuring short-term loan costs among banks in the offshore Renminbi market. “CNH” denotes offshore Renminbi, while “HIBOR” stands for the Hong Kong InterBank Offered RateThe rates range from overnight to 12 months, encompassing eight distinct short-term borrowing durationsAs a crucial indicator of funding costs within the offshore Renminbi market, CNH HIBOR illustrates the supply and demand dynamics of Renminbi while also playing a vital role in cross-border capital flows, bond investments, and foreign exchange transactionsIt provides critical insights for investors, cross-border traders, and financial institutions assessing cost implications for financing strategies and risk management.

Factors Influencing CNH HIBOR

Numerous factors affect the fluctuations in CNH HIBOR rates

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Some of the primary drivers include:

1. Market Liquidity and Monetary Policy ImpactTight or ample market liquidity directly affects the levels of CNH HIBORWhen liquidity tightens, borrowings become more expensive, consequently increasing CNH HIBORThe central bank’s monetary policy can significantly influence this as wellIn recent years, the liquidity environment has undergone considerable changes in ChinaTo counteract economic slowdowns, the central bank has implemented a series of monetary easing measures, including the purchase of offshore Renminbi in the forex market and withdrawing offshore Renminbi without reinjecting them into the borrowing market, thus tightening offshore liquidity and pushing short-term CNH HIBOR rates up.

For example, on November 20, 2024, the People’s Bank of China issued a new batch of central bank notes in Hong Kong with maturities of three months and one year, amounting to 45 billion RenminbiThrough this flexible management tool, they aim to satisfy investor demand while reclaiming some liquidity positions in Hong Kong, which in turn can raise borrowing costs in the offshore Renminbi market, making it more challenging for foreign investors looking to short the RenminbiSuch measures can help stabilize the forex market and ease the risks of excessive Renminbi depreciation.

2. International Economic ConditionsGlobal economic conditions, particularly the policy directions of major economies, can also affect CNH HIBOR trendsA typical example is the Federal Reserve's interest rate decisionsAs expectations for Fed rate hikes grow, investors may shift more capital into dollar-denominated assets, increasing selling pressure on the Renminbi

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Higher rates also raise investment costs for offshore Renminbi, which can further drive up CNH HIBOR.

Key Applications

CNH HIBOR is primarily utilized in the offshore Renminbi market, particularly in areas such as arbitrage trading, bond investment, foreign exchange markets, and cross-border capital flows.

For instance, in the offshore Renminbi market, investors may engage in arbitrage trading to capitalize on the interest rate differentials between China and the United StatesBy borrowing Renminbi and converting it into dollars, they can earn higher returns in the U.S. market.

Specifically, they would borrow Renminbi at the CNH HIBOR interest rate, exchange it for dollars, make deposits in the U.S. to earn interest, and finally convert the dollars back to Renminbi to repay the loan, with CNH HIBOR directly influencing the profitability of the arbitrage trade.

Profit from Transactions = U.SDeposit Interest Earned - Renminbi Financing Costs (CNH HIBOR Rate)

It is important to note that this equation assumes no exchange rate variations during the arbitrage process.

From the example above, it is evident that if U.S. market interest rates decline, or the cost of financing in Renminbi rises, arbitrage investors will see a considerable reduction in potential profits.

A report from the Hong Kong Monetary Authority in September 2024 noted that though the overnight offshore Renminbi rates showed volatility, they generally remained below 6% during the review period, illustrating a stable liquidity environment in the offshore Renminbi interbank market.

Pricing Principles

The determination of CNH HIBOR relies on rate submissions from at least 15 banks in Hong Kong

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These banks provide quotations for varying maturity periods of the Renminbi borrowing rates, which the association calculates to establish pricing for each maturityVariations in CNH HIBOR showcase changes in supply-demand dynamics for Renminbi while also reflecting market expectations related to the Chinese economy and its monetary policyAn increase in demand for Renminbi will typically raise CNH HIBOR, indicating tighter offshore liquidity, while a decrease suggests a surplus of liquidity.

Relationship with Forex Swaps

The CNH HIBOR has a dynamic and reciprocal relationship with forex swapsTypically, higher USDCNH swap points signal tightening conditions in the offshore Renminbi market.

Firstly, swaps involve exchanges between two currencies, and the CNH HIBOR reflects the borrowing costs in the offshore Renminbi marketIncreased demand for Renminbi in swap transactions can tighten offshore liquidity and thus elevate CNH HIBOR.

Secondly, the interest rate differentials present in swap transactions can influence CNH HIBOR levelsIf the rate differentials widen, it signifies increased relative returns for holding Renminbi, which can attract more capital into the offshore market, thereby impacting the direction of CNH HIBOR.

The USDCNH swap point refers to the swap points between offshore Renminbi (CNH) and the U.S. dollar

These points reflect the interest rate differentials between the currencies and are typically used for hedging exchange rate risks or speculating on currency movements.

Swaps are financial derivative transactions allowing investors to exchange two currencies at predetermined rates at a future date.

Based on the theory of interest rate parity, the pricing of swap markets principally reflects the interest rate differentials between two currencies under arbitrage conditionsWhen one currency's interest rate is higher than another's, the swap points are generally positive and vice versa.

In recent years, the dual floating exchange rate for the Renminbi has become the norm, leading to a decrease in speculative swap trading, while the dominant influence of the interest rate differentials between China and the U.S. has strengthened, causing swap point pricing to increasingly align with interest rate parity conditions.

Companies participating in Renminbi forex swaps often view them as liquidity management tools for exchanging one currency for another, typically by combining trade financing with forward transactionsThus, despite swap prices frequently deviating from actual interest rates, the differential remains a fundamental value basis for forex swap pricing.

The Interrelationship with Renminbi Exchange Rates

CNH HIBOR is a critical indicator of funding costs in the offshore Renminbi market while the Renminbi exchange rate represents its external value

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