China Companies Cut Foreign-Currency Debt Just in Time for Trump

(Bloomberg) -- Chinese companies’ foreign-currency debt load has shrunk significantly, reducing a key source of vulnerability as the yuan faces growing uncertainties under Donald Trump’s second presidency.

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The outstanding value of Chinese firms’ loans in non-yuan currencies fell to $570 billion as of the end of October, the least in 12 years, according to Bloomberg’s calculations based on central bank data. The figures include borrowings by certain government-linked entities and non-bank financial institutions.

The country’s foreign-currency bonds, excluding those issued by the government, now total $654 billion in principal value, the lowest since 2017, Bloomberg-compiled data show.

The plunge partly resulted from waning appetite for foreign-currency debt after a series of interest rate cuts by Beijing made local funding much cheaper, at a time when the Federal Reserve remained in its policy tightening cycle. Meanwhile, China’s property-led economic slowdown also sapped demand for developers’ offshore debt and weakened companies’ impetus to seek global expansion.

The lighter foreign debt pile may offer some relief to the yuan, which is under increased depreciation pressures ahead of Trump’s return to the White House. In a taste of what’s to come, the president-elect roiled markets again this week by saying he would impose additional 10% tariffs on Chinese goods.

“This will help Chinese companies handle risks from foreign debt repayment and FX volatility after Trump takes office,” said Le Xia, chief Asia economist at BBVA. Businesses will turn more cautious toward raising foreign-currency debt in the coming years with a focus on the health of their balance sheets, he added.

The loan data take into account of onshore deals handled by all types of banks and offshore lending from Chinese financial institutions. Data on loans offered by overseas banks aren’t available on the Chinese central bank’s website.

Cost was a big driver behind the plummeting foreign-currency loan and bond deals, thanks to the divergence of monetary policy paths between the People’s Bank of China and the Fed in the past two years. As a result, the gap between US and Chinese 10-year government bond yields reached its widest level in 22 years in April, and has since narrowed marginally.

That has encouraged more Chinese firms to turn inward for financing, taking their sales of yuan notes to a record 4.66 trillion yuan ($643 billion) in the third quarter, Bloomberg-compiled data show.

In contrast, a record wave of defaults among Chinese property developers, previously a dominant force of dollar debt issuance in Asia, caused the funding channel to nearly dry up.

Meanwhile, a slump in overseas mergers and acquisitions by Chinese firms was another key factor suppressing demand for foreign debt, according to Charles Chang, an analyst at S&P Global Ratings, citing challenges including tighter regulatory scrutiny on such deals especially in developed markets.

While the subdued demand for offshore credit is partly a reflection of China’s ailing economy, it may at least take some pressure off policymakers in their fight to defend a weakening currency.

The offshore yuan is down about 2% this year, on track for three consecutive years of losses.

“The front-loading of debt payment due to exchange rate fluctuation could be less,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. “Its impact on the yuan’s exchange rate could also be smaller.”

--With assistance from Wei Zhou, Xi Wang and Caroline Chu.

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