China Inc.’s Large Dollar Debts Fuel Beijing’s Efforts to Curb Yuan Plunge

05-Jan-2017 Intellasia | WSJ | 6:00 AM Print This Post

Concerns grow that companies with dollar debts will rush to repay them early, further pressuring the yuan

The large pile of foreign debt owed by Chinese companies, from state-owned banks to airlines, is giving added impetus to Beijing’s efforts to keep the yuan from falling too steeply against the rallying dollar.

The yuan dropped by 4 percent over the past three months, as the dollar recently hit a 14-year high against 16 currencies. The faster-than-expected depreciation is causing more businesses and individuals to try to get out of yuan, further pressuring the currency.

To bolster the yuan, the central bank and other agencies have ratcheted up controls on Chinese companies as well as citizens investing offshore. In the latest move, banks were ordered over the weekend to step up scrutiny of individuals’ purchases of foreign currency.

How Beijing manages the yuan is a global concern, even though the currency isn’t freely traded. A surprise devaluation of the yuan 17 months ago shocked global markets and battered the confidence of Chinese households and businesses.

Chinese companies with large amounts of dollar debts represent another motivation for stepped-up controls, economists and officials say. Those firms draw most of their revenue from domestic businesses, and a weakening Chinese currency requires them to expend more yuan to pay off the same amount of dollar debt – hurting their profits and encouraging them to pay off their dollar debts early. That could propel even more outflows, further weakening the currency.

Though the People’s Bank of China doesn’t give detailed breakdowns of Chinese companies’ foreign debt, more than half of it is in US dollars, according to economists and analysts.

Chinese businesses’ foreign borrowings increased by $47.7 billion – a 4 percent rise – to $1.2 trillion in the third quarter of 2016 from the second quarter, official data show. State banks, traditionally big users of external funding to help replenish their capital base, accounted for 38 percent of the jump.

Beyond state banks, big borrowers include property developers, airlines and local government companies that finance infrastructure, according to corporate filings and analysts. The country’s big three carriers – Air China Ltd, China Eastern Airlines Corp. and China Southern Airlines Co. – still have billions of dollars in foreign debt despite attempts to trim their external borrowings in the past year.

While the central bank wants a weaker yuan to help Chinese exporters and to better reflect market forces amid China’s slowing economy, it wants to control the pace of depreciation to avoid a damaging free-for-all.

“Most of China’s short-term external debts are concentrated in the business sector,” said Sheng Songcheng, a senior adviser at the People’s Bank of China. “The one-way depreciation expectations for the yuan could lead companies to buy foreign currencies to repay those debts even before they come due, potentially adding to the depreciation expectations.”

The potential for a negative feedback loop between currency depreciation and outflows, Sheng said, makes stabilising expectations for the yuan an urgent task.

The yuan dropped nearly 7 percent against the dollar in 2016, nearly double the decline from the year before. Some analysts and investors expect the currency to break the psychologically important level of seven yuan per dollar in the coming weeks.

Chinese airlines have been trying to pare the huge amounts of dollar debts they racked up in years past mostly to buy planes from Boeing Co. and Airbus Group SE, when the yuan was going strong. As the yuan weakened against the dollar, Air China incurred about $240 million in foreign-exchange losses in the first half of this year, denting its net profit to $498 million. The company has borrowed more with yuan funds, cutting the dollar ratio of its entire debt load to 59 percent as of June 30 from 73 percent as of the end of 2015.

Many other Chinese companies, especially local government-sponsored financing vehicles, have increased dollar borrowings in recent months to make up for tighter liquidity at home and to diversify funding channels – offsetting Chinese businesses’ rush to pay down their dollar debt.

For instance, Chengdu Xingcheng Investment Group Co., an entity owned by the inland city of Chengdu to finance highways, affordable housing and other projects, raised $300 million offshore in November by selling a five-year note yielding 3.25 percent annually, a relatively low rate compared with many other corporate issuers due to its government backing. Its bond was 4.5 times oversubscribed, the company said.

The yuan dropped nearly 7 percent against the dollar in 2016, nearly double the decline from the year before. Some analysts and investors expect the currency to break the psychologically important level of seven yuan per dollar in the coming weeks.

Chinese airlines have been trying to pare the huge amounts of dollar debts they racked up in years past mostly to buy planes from Boeing Co. and Airbus Group SE, when the yuan was going strong. As the yuan weakened against the dollar, Air China incurred about $240 million in foreign-exchange losses in the first half of this year, denting its net profit to $498 million. The company has borrowed more with yuan funds, cutting the dollar ratio of its entire debt load to 59 percent as of June 30 from 73 percent as of the end of 2015.

Many other Chinese companies, especially local government-sponsored financing vehicles, have increased dollar borrowings in recent months to make up for tighter liquidity at home and to diversify funding channels – offsetting Chinese businesses’ rush to pay down their dollar debt.

For instance, Chengdu Xingcheng Investment Group Co., an entity owned by the inland city of Chengdu to finance highways, affordable housing and other projects, raised $300 million offshore in November by selling a five-year note yielding 3.25 percent annually, a relatively low rate compared with many other

In battling to damp expectations for any precipitous fall in the yuan, the central bank has been tightening up controls on the movement of capital, making it more difficult for companies to invest overseas and limiting what individuals can do with their money.

During the New Year’s holiday weekend, staffers at commercial banks said they had to work overtime to prepare their systems for the latest instructions from the foreign-exchange regulator, an arm of the central bank: Scrutinise individuals’ applications for foreign-currency purchases.

Under the new order, as of January 1, individuals must fill out a detailed form when applying to tap into the $50,000 each Chinese is entitled to under an annual currency-conversion quota.

The scrutiny, the regulator said, is aimed at closing loopholes in the existing rules which allow Chinese to use the quota for travel and education, but not for investing in foreign markets.

Still, the money has been leaving China at a faster pace in recent months as the yuan keeps going down.

A net $69.2 billion exited the country in November, compared with a monthly outflow of about $50 billion since June, Goldman Sachs Group Inc. estimates.

It would be a “tough battle” for the central bank to prevent the yuan from falling more than 5 percent this year from the current level of about 6.95 per dollar, said Li Daokui, a Tsinghua University professor and former adviser to the central bank. Li said that China’s authorities should further tighten capital controls to curb outflows.

http://www.wsj.com/articles/china-inc-s-large-dollar-debts-fuel-beijings-efforts-to-curb-yuan-plunge-1483468681

 


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