100 yuan bank notes and $100 bills. Photo: Reuters

China continued to squeeze the global market for the yuan Friday, sending the cost of borrowing the currency in overseas markets soaring to a near-record high.

Investors and analysts say the nosebleed rates are likely to continue as China’s central bank battles to keep the country’s currency from weakening too far and fast.

The rate that banks charge each other in Hong Kong’s overnight lending market for the yuan jumped to 61.3% on Friday--the highest in a year and the second-highest level on record. That rate was 38.3% on Thursday, and has remained above 10% since Dec. 30.

Although that offshore yuan-lending rate isn’t set by the People’s Bank of China, the central bank can effectively control it by directing state lenders to withhold yuan from other banks, something it has been doing recently.

The PBOC also set its daily “fix”—the price that determines the yuan’s trading range in the domestic market—0.9% stronger against the U.S. dollar on Friday, its biggest increase since 2005 when the bank surprised markets by removing its dollar peg.

Despite those moves, the yuan weakened Friday both onshore and off--falling 0.6% to 6.9230 versus the dollar in the domestic market and 1% to 6.8578 in late trading in Hong Kong. That eroded some of the yuan’s sharp appreciation from earlier in the week, when the currency jumped 2.5% against the dollar in two days on the PBOC’s steps to tighten liquidity offshore.

One of the primary targets of the PBOC’s moves is investors trying to bet on a decline in the yuan by borrowing the currency in Hong Kong, swapping it for dollars and later swapping it back at a more favorable rate. That trade becomes more expensive as yuan borrowing costs rise, which can force investors to abandon those bets by buying back yuan, in turn driving the currency higher.

“It’s super painful to hold short positions in [the yuan] when the funding costs are soaring as they are at the moment,” says Christoffer Moltke-Leth, director of global sales trading at Saxo Capital Markets in Singapore.

However, some investors say Chinese officials could also be anxious about the country’s foreign-exchange reserves, which have been falling as the central bank taps them to defend its currency. The reserves are currently just above a psychologically important level of $3 trillion, and investors say a fall below that level Saturday--when December’s figures are set to be revealed--could spark more trading volatility in the yuan.

Some traders say the central bank also has an incentive to stem the yuan’s decline in the days leading up to the Jan. 20 inauguration of U.S. President-elect Donald Trump, who has accused China of keeping its currency too cheap.

Another milestone is an exchange rate of 7.0 yuan to the dollar, which would be the lowest level since mid-2008, and a potential trigger for more investors to dump the currency, market watchers say. The yuan approached that level earlier this week, before the PBOC stepped in to dry up liquidity offshore.

“Our impression is that the PBOC is very sensitive about the key 7.0 level for the yuan,” says Liu Weiming, chief investment officer at Fu Xi Investment Management Pte. Ltd. “You could say that the latest intervention in Hong Kong was mostly about defending that level. Once 7 is broken, people will expect 8 and it will get even worse.”

Although the PBOC has kept the currency stronger than 7.0 yuan to the dollar for now, many market watchers say a weaker level is inevitable. Contracts to buy the currency in a year’s time suggest that investors expect an exchange rate of 7.1975 yuan to the dollar at that time. While that rate has come down this week, implying a stronger yuan, it hasn’t fallen below 7.0 since mid-November.

That means the PBOC will likely continue to tighten offshore liquidity and send investors running out of negative yuan bets in the next few weeks, as well as bolster the currency against a wave of outflows as residents exchange yuan for foreign cash.

“At the moment the bias is to control” the yuan, says Brad Gibson, a fixed-income portfolio manager at AllianceBernstein in Hong Kong.