The USD/CNY weakens to 6.4452 levels, with the Evergrande Group defaulting. If the fall of the real-estate giant reflects on the economy, the PBOC may step in.
The PBOC will step in to prevent the domino effect on the economy by the defaulting Evergrande Group. Meanwhile, the US Dollar index is at the 2021 high levels as demand for the safe-haven increases.
USD/CNY Weakens on the Fall of Evergrande Group
The Yuan lost almost 0.9% when Chinaâ€™s Evergrande Company missed its payment deadline. But it resumed back to the early September rates. However, on Friday, October 1, 2021, it slid to 6.4452 levels.
The Yuan was just a bit weak on Friday when the property giant Evergrande Group defaulted. However, there is a negative spillover seen in the global markets. The forex markets of most Asian countries are under pressure.
The USD/CNY surged on September 16, from 6.4299 to 6.4600. After a long holiday, the Chinese foreign exchange market reopened on September 22. But, the Chinese Yuan did not fall but held on to the 6.4600 to 6.4700 levels.
However, the US Dollar to the Chinese Yen closed at 6.4452 for the weekend, showing a sharp slide, though delayed by a week.
Real-Estate Giant Evergrande $300 Million in Debt
Lehman Brothers wobbled in 2008 and was the cause of a financial disaster. In 2021, Evergrande is the tip of the iceberg with the potential to hurt the global economy.
Evergrande, the real-estate developer, affected the Chinese economy threatening the global economies too. The $300 billion debt is just a glimpse of worse to come. Evergrande saw good growth amid high borrowing but has come to the brink of collapse in September 2021.
Evergrande has just a month ahead for making late payments. It has a $300 billion debt, which is equivalent to 2% of Chinaâ€™s GDP. Around 1.6 million apartments are pending delivery to the people. 70% of the home ownerâ€™s wealth is in real estate. The long-term effect of the defaulting real-estate sector is yet to be seen.
Evergrande is preparing to sell its stake in Shengjing Bank Co for 10 billion yuan to the Shenyang government. The proceeds will go towards a settlement with the lender. But nothing is said about its debt to individuals and bondholders. The $300 billion in debt makes it the most indebted company across the globe.
There is mounting pressure on Evergrande to repay its debt. An $83.5 million coupon debt, due on September 23, has not been paid. A $45.2 million coupon debt as a dollar bond is due for payment. There are many coupon payments to be repaid by the end of the year. The developer has to sell non-core assets to meet its coupon debts.
Fitch Ratings downgrades the credit rating of the Evergrande developer from C to CC.
PBOC Outlook on Evergrande
Analysts are not willing to give a sell strategy on Evergrande, despite its big default. The PBOC may step in at any moment to stop the depreciation, say experts.
The Chinese government has taken a tough stance on the Evergrande issue. It remains to be seen if the Chinese central government would take steps to bail out the real-estate developer. The Evergrande effect should not impact others in the same sector, and the central bank will watch out for any domino effect on the real estate sector.
Evergrande Real Estate Group is a property developer in China and ranked on the Fortune Global 500 at 122. It has its headquarters in the Guangdong Province in China.
Evergrande prices on the Hong Kong exchange slid from 4.320 Yuan on September 1, 2021, to 2.120 Yuan on September 20. It was trading at 2.950 Yuan on September 30.
Whether Evergrande repays its debts or fails to do it, investors are moving out of the Chinese Yuan. The capital outflow is increasing, and there is slowing economic growth. There may be further capital outflow say, experts.
US Dollar at 2021 Highs
China has provided cheap labor to US companies for many years. If a decoupling happens between the US and China, it will make everything expensive.Â If the United States looks elsewhere for labor, its production costs will go up.
Soaring prices for gas have hurt demand. Gas prices in Europe have gone up almost 500% in the past year. The energy crisis in China is a threat to the supply chain that connects the global markets.
The central banks of both the US and Europe have said that they will raise interest rates soon. The US Dollar will start tapering by the end of this year, and it will bring a rebound on the Dollar prices, which will exert pressure on the Yuan.
US yields are increasing, which may weaken the Yuan further. A top executive of Huawei Technologies Co has brought hopes of a renewal of the US-China trade relations. The Chinese Yuan will benefit from this relationship.
The US Dollar slipped 0.019% after touching 93.455 on September 23. But the greenback strengthened last week as the real-estate sector wobbles in China. Investors prefer the safe-haven US Dollar, which surged from 93.40 to 94.40 last week, trading at the 2021 highs.