Yuan Bears Say Record Dollar Debt to Fuel Decline: China Credit 

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Yuan bears have added Chinese companies’ record dollar borrowings to the list of reasons why the currency may weaken.

Chinese firms raised $196 billion from loans and bonds this year, 11 times more than the $17.7 billion of 2008, data compiled by Bloomberg show.

The People’s Bank of China engineered a 2.6 percent decline in the yuan in the first quarter to cut one-way bets on the currency and prepare companies for the risk of exchange-rate weakness.

“Leverage does place China in the higher risk category in the Asian region,” Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong, said by phone yesterday.
RBC’s Trinh predicts the yuan will decline to 6.20 per dollar by the end of 2015, while Societe General estimates a drop to 6.18 by end-December.

Daiwa sees the yuan falling to 6.60 by the end of next year on the risk of hot money leaving China as the Fed tightens, Kevin Lai, a senior economist in Hong Kong, wrote in an Oct. 27 report.
“We see the odds of more rapid outflows going into next year, if the Fed finally begins to tighten and withdraw liquidity from the system,” Lai wrote in the report.

Concern that the PBOC may instill volatility in the currency is already causing borrowers of dollar-denominated debt to hold on to their foreign exchange, according to Anthony Chan, Asian sovereign strategist at AllianceBernstein, which oversees $473 billion globally.

Chinese corporate debt swelled to 124 percent of gross domestic product in the second quarter of 2014 from 110 percent in 2009, the U.S. lender estimates.
The U.S. currency’s share of bonds issued by Chinese entities has risen to 14 percent this year from 2.4 percent in 2008, data compiled by Bloomberg show.

Economic expansion slowed to 7.3 percent in the third quarter, the least since 2009. Consumer prices increased 1.6 percent from a year earlier in September, the smallest gain in more than four years.

Trade data suggest fake exports to Hong Kong are being used to obtain dollar financing. China recorded $1.56 of exports to Hong Kong in September for every $1 in imports the city registered, leading to a $13.5 billion difference, according to government data compiled by Bloomberg.

The risk posed by the surge in U.S. dollar borrowings cannot be underestimated as China’s financial system may go through periods of stress when bad loans rise quickly, Aaron Low, principal of San Franciso-based emerging-market fund Lumen Advisors LLC, said in a Nov. 5 e-mail interview.

 

Source: bloomberg-Yuan Bears Say Record Dollar Debt to Fuel Decline: China Credit

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