(Bloomberg) – The offshore yuan, the exchange rate for China’s foreign exchange trading outside the country, is poised to become the center of attention in financial markets around the world.
The offshore currency is one of the few Chinese assets to trade 24 hours a day, meaning it will come under scrutiny from investors preparing for the consequences of a possible default by China Evergrande Group on Monday. Other options for assessing contagion will be limited due to the holidays that will close operations in China and Hong Kong for the week.
The offshore yuan lost a total of around 0.7% on Thursday and Friday, mainly due to a stronger US dollar and the sell off of its emerging market peers. The coin is now trading near its 50-day moving average of around 6.4696 per dollar and may extend its weakening to test the 200-day moving average at 6.4737 if market sentiment worsens in Evergrande. A breach of the 200-day average paves a path toward the 6.50 level, last seen on August 23.
Chinese authorities have already told major banks that they will not receive the interest payments owed on the Evergrande loans on Monday. It’s also unclear whether Evergrande intends to pay about $ 84 million of interest on dollar bonds that mature on Thursday, September 23.
Policy makers and businesses alike are bracing for potential market contagion. The People’s Bank of China added $ 14 billion (90 billion yuan) in net funding through buyback agreements on Friday, the most since February, in a bid to avoid any funding constraints.
The Agricultural Bank of China, one of the Big Four state lenders, made provisions for insolvency for its exposure to Evergrande, according to Reuters. Banks are bracing for a liquidity squeeze, part of the reason they’re pouring dollars into onshore swap markets, leading to tight liquidity conditions on the yuan onshore, some analysts say.
A staggered holiday schedule in the mainland China and Hong Kong markets complicates matters further. All domestic financial markets will be closed on Monday and Tuesday, although the Hong Kong markets will remain open. On Wednesday, domestic markets will resume operations, but Hong Kong will go on vacation.
Here is a list of Evergrande debt events and market schedules for the week ending September 24:
Monday, September 20: All of China’s domestic financial markets are closed and all of Hong Kong’s markets are open. Evergrande’s shares and dollar bonds are traded in Hong Kong, and a default on its bank loans is expected. The offshore Chinese yuan is trading throughout the day, although traders will not reference a daily BPC fix. Tuesday September 21: All domestic financial markets remain closed and all Hong Kong markets remain open. Evergrande shares and dollar bonds continue to trade in Hong Kong. The offshore Chinese yuan is trading throughout the day, in the absence of a daily BPC fix for a second session Wednesday September 22: All local financial markets reopen and all markets in Hong Kong close. Evergrade dollar stocks and bonds trading will take a break. The offshore Chinese yuan trades throughout the day alongside its onshore counterpart, although the Hong Kong holiday may lead to substantially lower volumes and worse liquidity conditions on that day. Thursday, September 23: All markets in mainland China and Hong Kong will open. Evergrande will decide whether or not to pay the interest owed on your bond in dollars.
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