The Chinese yuan hit a new yearly low to the dollar, as the possibility of a larger credit crunch in China loomed. A few days back, Shanghai Chaori filed for corporate bond default as it would no longer be able to make the interest payments on issued bonds, leading a few to speculate about a potential credit crunch. This week, another potential corporate default hit the airwaves and prompted investors to worry that a full-blown crisis might be in the cards.
This week, a large Chinese real estate firm announced that it is at risk of bankruptcy. Zhejiang Xingrun Properties claimed that it wouldn’t be able to make the payments on corporate bonds issued and it doesn’t appear that the Chinese government would intervene to give the company a bailout.
With that, traders are scrambling to let go of their Chinese yuan holdings. Chinese Premier Li Kequiang even mentioned that these defaults might be necessary for now in order to promote the greater good of China in the longer run and prevent a larger-scale credit crunch.
Chinese Credit Crunch Scenario
If China does announce more defaults in the coming months, the Chinese yuan has the potential to fall to yet another set of lows to the dollar. Chinese monetary policy officials have already widened the yuan trading band a few times this quarter in order to allow their currency to fall further. This goes against their previous promise to let the yuan appreciate freely against the US dollar and other currencies in order to help rebalance the global economy.
Furthermore, increasing odds of an actual credit crunch in China might lead to overall risk aversion in forex and equities. This could lead to a selloff among higher-yielding currencies, particularly the Australian dollar and the New Zealand dollar, and renewed demand for the safe-haven US dollar. Stocks of emerging economies could also be in jeopardy, as Asian markets could suffer a bloodbath if the Chinese credit crunch worsens.
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