Chinese government depreciates Renminbi (RMB), which could possibly be catastrophic because Chinese corporations have been borrowing from abroad with low-interest rates. And as foreign currency, such as the U.S. dollar (USD) appreciates, it would be more expensive for those corporations to repay their debt. The Chinese government is depreciating their currency to continue to be competitive for foreign businesses.
This article is copied and pasted from Bloomberg View. Visit the source for the two charts that I couldn’t copy and paste, and for the author’s and editor’s contact info. There will be a link to a blog post (opinion piece) from Reuters about this situation at the end.
China Makes Debt Burden Heavier for Others
China’s surprise move to weaken the yuan will have repercussions far beyond last week’s market turmoil. For one: Governments and companies in emerging markets will have a harder time paying the dollar-denominated debt they have amassed.
The yuan’s depreciation — by almost 3 percent against the U.S. dollar — triggered instability and exchange-rate declines across emerging markets. As of Friday evening in Asia, the Malaysian ringgit was down 3.8 percent from a week earlier. The Turkish lira, Mexican peso and Russian ruble also fell sharply. Here’s a ranking:
The depreciations might help the countries’ exports remain competitive. But they also expose a vulnerability: Over the past several years, borrowers in emerging markets have built up more than $2 trillion in dollar-denominated debt. When the U.S. currency was cheap and the Federal Reserve was holding interest rates close to zero, that debt seemed like a great deal. Now, with the dollar getting stronger and the Fed set to start raising rates, it’s becoming more of a burden.
Here’s a breakdown of the dollar-denominated government and corporate bond debt of selected emerging-market countries, as a share of gross domestic product (it excludes most loans, which can be significant):
If investors decide the debts aren’t sustainable, they could pull out en masse, starting a dangerous spiral of declining exchange rates and financial stress that could render otherwise viable companies and governments insolvent. One can only hope that regulators are trying to understand where the resulting losses would be concentrated, and how to mitigate the potential fallout.