Tuesday, April 23, 2024

"Yuan internationalization drive hits a local speed bump" (slow motion devaluation)

From Asia Times, April 23:

Chinese companies reluctant to convert FX earnings into yuan as incentives rise for PBOC to let the currency fall  

As Chinese leader Xi Jinping works to increase the yuan’s role in global trade and finance, he’s encountering an unexpected speed bump: mainland companies.

New data from the People’s Bank of China (PBOC) suggest corporate chieftains are dragging their feet on converting foreign-exchange earnings into local currency.

In March, FX deposits rose to US$833 billion from $779 billion a month earlier, signaling that businesses are slow-walking moves to swap earnings into their home currency.

The most obvious explanation: higher offshore interest rates that are contributing to a weaker-than-expected yuan.

“This huge positive yield spread is not evaporating anytime soon,” says Alvin Tan, currency strategist at RBC Capital Markets.

The rate differential between the US and China is the most positive since 2007. “This powerful fundamental fact,” Tan notes, “is enough to explain why Chinese exporters are reluctant to exchange dollars for yuan.”

It’s also another reason for Beijing’s currency managers to resist the urge to chase a falling yen downward in the months ahead. It might backfire in ways that run counter to Xi’s grand vision for “yuanization.”

Granted, Xi and Premier Li Qiang have so far resisted the urge to devalue. But as Asia’s biggest economy hits intensifying headwinds, a weaker exchange rate could be just the thing to juice exports and ensure gross domestic product (GDP) stays near 5% and deflationary pressures remain in check.

There are myriad reasons why Team Xi and PBOC Governor Pan Gongsheng have not chased the yen lower.

For one thing, it would make it harder for property development giants to make offshore bond payments, raising the odds of more China Evergrande Group-like defaults. For another, it could make China an even bigger flashpoint ahead of the November 5 US election....


We've been looking at the role of China's dollar-denominated debt in the policy-making context for years. Here's a post fromm 2020:

"China is underestimating its US$3 trillion dollar debt and this could trigger a financial crisis, says economist"
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....

And 2019:
SCMP: "China exchange rate drop could continue into 2020 as it tries to offset US tariff impact, analysts say"
Everything is connected.
One consideration that we are not seeing get enough play is the dollar denominated debt that Chinese companies have issued. More below but first up the South China Morning Post...


China Has $3 Trillion of Dollar Denominated Debt. That Is A Potential Disaster
With Treasury Secretary Mnuchin last month reiterating his concern that China was devaluing the yuan (SCMP: China is letting value of yuan slide to offset trade war ...) I thought it time to re-post this piece from November 2018.

China is in a bit of a bind with the yuan. While devaluing would indeed offset the tariffs, it would also increase both the interest expense and maturity pay-off cost of all that dollar denominated debt....

Be all that as it may be, it looks like the Chinese-powers-that-be have decided to do the slow-motion devaluation and  it is costing more and more yuan to buy a dollar, with 8:1 sometime in 2025 being quite possible.

But if so, woe unto the German exporters. there's a reason Scholz was in Beijing. 
From TradingView, the last month of USDCNY action:

Chart Image


You can see why the Chinese companies would like to keep their FX reserves in FX.