Citi estimates that Chinese corporates have used their balance sheets, mainly through trade channels, to build up around $800 billion in speculative foreign exchange positions by holding renminbi denominated assets funded by foreign-currency liabilities. Those positions have been cut in the past two months as Chinese corporates have found it increasingly difficult to obtain foreign-currency credit to fund their holdings and have been forced to buy back USD, says Citi.
That strong buying of USD has caused CNY, onshore renminbi, and CNH, offshore renminbi, to trade much weaker than the People’s Bank of China’s (PBoC) daily fixing, with CNY almost touching the upper limit of its newly widened trading band.
| Spread between USDCNY spot and fixing |
| Source: Bloomberg |
Citi says while Chinese corporates’ onshore foreign-currency liabilities have remained largely stable at $750 billion, their offshore foreign-currency liabilities plunged from around $100 billion at the end of February to $50 billion at the end of May.
Weisheng He, analyst at Citi says if the dollar buying from Chinese corporates reflected anticipation of a weaker renminbi, then both onshore and offshore positions would have been cut.
Instead, he believes the reduction of only offshore positions means that the dollar buying reflects the fact that corporates are finding it much more difficult to obtain funding as European banks deleverage.
Traditionally, European banks have been the largest financer of Chinese corporates. As of the second quarter of 2011, data from the Bank for International Settlements shows European bank lending to China stood at $280 billion, about 45% of the country’s foreign debt.
“Even after the sharp decline in the past three months from $100 billion to $50 billion, there is still scope for the offshore foreign-currency liabilities to be unwound, as the European banks continue to deleverage,” says He.
At the current rate, the remaining stock will be unwound within three months. In the meantime, USDCNY should continue to trade higher than the PBoC’s fixing.