This is an old warning, November 16, 2018, but very important for an understanding of the high wire act the PBOC and the Government/Communist Party are embarked on.
From the South China Morning Post, back before the CCP's crackdown on Hong Kong forced the SCMP to toe the party line.
Property developers and other mainland companies and investors that have borrowed dollar-denominated debt at low US interest rates are now facing repayment problems due to Federal Reserve rate increases and stronger greenback
Massive domestic debt has long been a headache for Beijing, but it is China’s growing external US dollar leverage that is being underestimated and it could possibly trigger a major financial crisis, according to Kevin Lai, chief economist for Asia excluding Japan at Japanese investment bank and securities brokerage Daiwa Capital Markets.
China’s US$3 trillion dollar debt makes it especially vulnerable because of tightening US dollar liquidity, a weakening yuan and the ongoing US-China trade war, said Lai.
Massive domestic debt has long been a headache for Beijing, but it is China’s growing external US dollar leverage that is being underestimated and it could possibly trigger a major financial crisis, according to Kevin Lai, chief economist for Asia excluding Japan at Japanese investment bank and securities brokerage Daiwa Capital Markets.
China’s US$3 trillion dollar debt makes it especially vulnerable because of tightening US dollar liquidity, a weakening yuan and the ongoing US-China trade war, said Lai.
Global dollar debt outside America has risen to US$12 trillion today from US$9 trillion in 2013, according to Lai. Of that total, 25 per cent, or US$3 trillion, has been borrowed by China Inc and its subsidiaries in Hong Kong, Singapore and the Caribbean. China’s US dollar cross-border claims have risen faster than any other emerging economy’s despite its partially closed capital account.
In response to two financial market challenges – the “taper tantrum” in 2013, when the US Federal Reserve started tightening monetary policy; and an attempt by the People’s Bank of China to reform the exchange rate in August 2015 – China took on even more dollar debt, instead of paying it down and resolving fundamental issues with corporate efficiency and governance.
“Can this trade war push the world’s dollar debt further to US$13 trillion or US$14 trillion?” said Lai, adding that the size of dollar debt globally was probably peaking given US dollar tightening. This would lead to investors selling their assets to get back their dollars and paying back their dollar debt. “We will be talking about a major financial crisis – a dollar debt crisis.”
The amount of dollar debt raised by China in its offshore centres that has entered its banking system is worrying given the prospect of further depreciation pressure on the yuan’s exchange rate, said Lai.
Traders, investors and their clients have in the past taken advantage of a lucrative spread between US and Chinese interest rates to borrow cheap dollar debt and convert it into higher yielding yuan-denominated assets.
But in an effort to support lending and economic growth, the PBOC has raised its rates only slightly in response to interest increases implemented by the US Fed. This has caused the differential between US and Chinese rates to narrow rapidly, to the point where it no longer offsets the cost of paying back the external dollar debt in ever-more-expensive US dollars.
The yuan was changing hands at 6.9439 per US dollar on Thursday, after tumbling 11 per cent since March. For many investors, their comfort zone lies in the range between 6.20 per US dollar and 7.00 per US dollar, so any clean break below the 7.00 threshold could trigger a major bout of yuan selling, forcing its value down further, said Lai.
As a result, dollar loans will become even more unmanageable, leading to more selling of the yuan and a possible negative spiral as the US$3 trillion “carry trade” in dollar debt is unwound.
“We are talking about a huge dollar whammy. If the yuan continues to depreciate then you will see a dollar debt crisis,” said Lai.
In a reflection of surging US dollar funding costs, the one-month London Interbank Offered Rate (Libor) hit 2.32 per cent this month, it’s highest level in a decade.
And China Evergrande Group, mainland China’s most indebted property developer, is expected to be forced to pay an interest rate of as high as 11 per cent for its planned issuance of US dollar bonds, rumoured to be of about US$1.5 billion, analysts said.....
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An astute understanding of the problem and the reason I've been using the word 'insoluble'.
"China Increasingly Obscures True State of Its Economy to Outsiders"
China has an almost insoluble problem. On one hand the collapse of the property sector is very deflationary. The policy prescription would normally be looser monetary and fiscal regimes to support the internal economy and a weaker yuan to make Chinese exports even more attractive."Evergrande, Kaisa cut by Fitch to default after missed payment deadlines"
But looser policy/weaker yuan raises the cost of China's dollar-denominated debt. What to do?
Hide the numbers.
"Yuan Tumbles After China Hikes FX Reserve Ratio"
Chinese Real Estate Developer Kaisa Has A Problem
The problem isn't just Kaisa, or even just Evergrande. The problem is the Chinese real estate developers have at least $5.2 trillion in debt outstanding with most of that debt backed by overvalued/overappraised property. Not quite as risky as a promissory note but not commanding the kind of interest rate an uncollateralized signature loan would demand.Making things even scarier is how much of the debt is denominated in dollars. Any weakness in the yuan immediately raises the cost to buy dollars to make interest payments. And because yuan weakness would also raise the cost of redeeming the dollar-denominated debt, the present value of the debt would drop precipitously just because of the forex, even before credit considerations.
