A couple of weeks ago China SCE Property Holdings, a company based in the coastal city of Xiamen, quietly redeemed an outstanding $350m dollar bond more than a year before it was due. I very much doubt that many among the elites crunching around in the snow at the World Economic Forum in Davos noticed this move. They have plenty of macro-level problems to distract them, with markets tumbling, the oil price sinking and geopolitical tensions sky-high.
But the fate of that little $350m bond points to a trend that helps to explain some of today’s market turmoil — and also highlights the headache confronting policymakers in China, Washington and elsewhere. In recent years emerging markets companies in general — and Chinese groups in particular — have dramatically increased their dollar debts. The Bank for International Settlements calculates this now stands at $4,000bn for emerging markets as a whole, four times higher than in 2008. A quarter of this debt has emanated from China.
Until lately, using dollar-based markets to issue bonds or take loans seemed a smart strategy for Chinese groups. After all, the US Federal Reserve has kept dollar rates at rock-bottom lows and the renminbi has strengthened against the dollar in the past decade. But now the US interest rate cycle has turned and the renminbi has weakened. Moreover, contrary to assurances made in Davos by China’s most senior regulator that Beijing is committed to maintaining a stable currency, most delegates I have spoken to expect the renminbi to fall 10-15 per cent against the dollar in the next year.