An unprecedented surge in the cost of borrowing in yuan in Hong Kong adds to questions about the outlook for the city’s role as the biggest offshore hub for the Chinese currency.

The overnight yuan Hong Kong Interbank Offered Rateclimbed 53 percentage points to 66.82 percent on Tuesday — a side-effect of a campaign by the People’s Bank of China to curb arbitrage between the offshore and onshore rates for the currency.

“A 66 percent rate is murderous for others being swept up in this who are not speculating,”said Michael Every, head of financial markets research at Rabobank Group. Central banks “usually win a round like this, but lose in the end,” he added.

As Hong Kong’s Chief Executive Leung Chun-ying prepares for his policy address on Wednesday, one topic hanging over the city is the outlook for the yuan business amid speculation that the currency could weaken further. The city’s yuan deposits have fallen from a record reached in December 2014. Issuance of Dim Sum bonds — yuan-denominated notes sold outside of China — fell 38 percent last year.

‘Unloved’ Bonds

The Dim Sum bond market has had limited trading “for months, simply because investors think the yuan is going to depreciate,” said Gordon Ip, a Hong Kong-based senior fund manager at Value Partners Group Ltd. Now, “Dim Sum bonds will be even more unloved,” he said.

Analysts are assessing how quickly yuan loan rates may return to more normal levels in Hong Kong.

“Given that the Chinese have achieved their target of narrowing the convergence between offshore and onshore, we should see the end of higher rates,” said Ryan Lam, Hong Kong- based head of research at Shanghai Commercial Bank Ltd. “It’s a short-term move. I don’t see this as a start of a crisis, at least for now.”

Liquidity Support

The Hong Kong Monetary Authority on Monday said demand for liquidity support from banks increased after the interbank yuan rate jumped to 13.4 percent. The city’s de facto central bank didn’t immediately comment Tuesday.

The jump in the yuan rate reflects a deliberate move by the PBOC to enforce capital controls to align the yuan’s onshore and offshore values, said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA.

For Hong Kong’s economy, which relies on banking as a pillar for growth, the squeeze is potentially not good news, Xia said. “This city is highly dependent on its financial sector, so if we see a shrinkage of the offshore market that is definitely not good for the real economy,” he said.

A surprise yuan devaluation last August led to a record drop in Hong Kong’s yuan deposits as some investors switched into Hong Kong dollars.