Yuan bears said this month’s rally should not be taken as a sign China’s great reversal in capital flows has finished. Goldman Sachs Group Inc warned that any further shock depreciation would only accelerate the exit.
Daiwa Capital Markets Inc, which predicted the outflow risks back in 2014, said less than half of the US$3 trillion of US dollar debt that ended up in China has been repaid.
Commerzbank AG said record new yuan loans last month showed companies are raising money to repay more debt abroad. Corporate bond sales onshore have more than doubled this year, as offshore issuance in the dollar dropped about 30 percent.
Goldman Sachs said there were US$550 billion of outflows in the second half of last year, and that every 1 percent yuan weakening risks US$100 billion more.
The yuan’s appreciation in the four years through 2013 prompted companies to borrow dollars offshore and use the money to profit from a strong currency and higher interest rates in China. The one-way bets began to fade in 2014, as the exchange rate to the dollar plunged the most since 1994. This month’s 0.9 percent rally has not dissuaded analysts from forecasting a further 3.4 percent drop by year’s end.
“We’re less than halfway done” in terms of carry trade unwinding, Daiwan chief economist for Asia excluding Japan Kevin Lai (賴志文) said. “My main focus is not about unwinding, but the reverse carry trade. People are taking fresh positions to sell the yuan. We’re talking about a massive deflationary scenario now, which is very bad for the market, economy, for everything.”
Daiwa’s estimate for the carry trade is on the high side, because it includes borrowing by companies outside China, such as Hong Kong and Taiwan.
Oversea-Chinese Banking Corp (華僑銀行) economist Tommy Xie estimated the positions at about US$1 trillion, based on data from the Bank for International Settlements and the Hong Kong Monetary Authority.
Chinese companies’ total foreign currency debt dropped by about US$140 billion in the second half of last year to US$1.69 trillion, including corporate borrowing from onshore banks, Goldman estimated. That was dwarfed by the US$370 billion outflows by Chinese residents buying foreign currencies, it said.
“A risk is that any further shocks to renminbi confidence and the perception of policy uncertainty could sharply compound the outflow pressure and render any subsequent stabilization attempts much less effective,” Goldman wrote in a note released to media on Jan. 26.
Outflows from China increased to US$1 trillion last year, according to estimates from Bloomberg Intelligence. That was more than seven times the amount of cash that left in 2014.
Yuan depreciation expectations are to accelerate the exit further this year, a researcher with Chinese think tank State Information Center wrote in the Shanghai Securities News this week, reducing the effectiveness of monetary tools, such as cuts in interest rates and bank reserve requirement ratios.
Last month’s surge in new credit to a record 3.42 trillion yuan (US$524.5 billion), caused by seasonal factors and a switch into local currency liabilities from overseas borrowings, risks fueling bad debt amid the slowest economic growth in a quarter-century. New yuan loans surged to an unprecedented 2.51 trillion yuan, while onshore bond issuance has reached 2.8 trillion yuan so far this year.
Chinese firms’ dollar note sales dropped annually last year for the first time since 2008 to US$220 billion, as raising funds onshore became cheaper.
Policymakers are to guide the yuan lower after keeping it stable for a while, Goldman Sachs Gao Hua Securities Co Ltd (高盛高華證券) Beijing-based chief China economist Song Yu (宋宇) said.
He estimated the currency would depreciate to 7 against the dollar by the end of this year and to 7.3 by the end of next year.
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