Record Dollar Borrowings May Lead to Yuan Decline

Yuan bears have added Chinese companies’ record dollar borrowings to the list of reasons why the currency may weaken.

Chinese firms raised $196 billion from loans and bonds this year, 11 times more than the $17.7 billion of 2008, data compiled by Bloomberg show. Societe General SA, Daiwa Capital Markets and Royal Bank of Canada predict the yuan, which is headed for its first annual decline in five years, will drop further in coming months as the outlook for rising U.S. interest rates and a weakening Chinese economy exposes the risk of overseas liabilities.

The People’s Bank of China engineered a 2.6 percent decline in the yuan in the first quarter to cut one-way bets on the currency and prepare companies for the risk of exchange-rate weakness. Daiwa Capital Markets estimates that, in addition to foreign-currency borrowing, $1 trillion of hot money has flooded into China since the Federal Reserve started quantitative easing in 2008, including through shadow-banking channels such as export financing and metals purchases.


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