(ATF) The initial hits pummelling the high-flying yuan came late last week when US and Chinese (Shanghai - Shenzhen - Hong Kong) stocks re-coupled and the US stocks malaise since September 2 infected East Asia.
China's markets had shown resistance to the extended US markets' swoon, which drove the Nasdaq well into correction territory (-10% and below) and saw the S&P 500 scrape just by it.
These were US falls caused mainly by the failure of Congress to provide fiscal support for the economy and a stern US Fed warning that monetary policy alone would not bring about an in-depth recovery.
But China's US$49-trillion financial services industry is too deeply engaged in global financial markets at this stage and affected by global financial flows to go off on its own track for long.
By last Monday (Sept 21), Chinese markets had been infected by the US virus. And as foreign demand for Chinese securities ebbed, so did demand for the Chinese currency.
On September 18, the yuan had reached its highest level since April 2019 and traded at 6.75 to the US dollar. Today, a week later, the entirety of the sharp gains between September 10 - 18 have been reversed.
This morning the PBoC set central parity for the CNY at 6.8121; but that proved unrealistic.
As at this writing (6pm HK time) the onshore CNY is trading at 6.8248, the offshore deliverable CNH stands at 6.8333.
Has the relentless yuan rise since late May of this year come to a premature end?
There is nothing in the recent fluctuations that suggests any change in yuan and US dollar fundamentals.
Monster debt load
A worrisome development, however, that could prolong the pause in the yuan's rise is the financial impact of several overstretched, under-regulated financial holding companies coping with very large debt loads and short-term repayment obligations.
Most notorious among those is China Evergrande Group, China's largest property developer by sales, which – as of June 30 – had US$121 billion in debt and must repay some $19 billion of that by January 31, 2021.
How exactly they will manage that no one knows as of now. An alleged "help us by allowing us to list" letter from the company to government regulators drove the company's stock down another 9.46% today.
The company denied the existence of such a letter and called it "fake". But doubts regarding Evergrande's liquidity persist.
They were somewhat alleviated when the Hong Kong stock exchange this afternoon gave the nod to Evergrande to list shares of its property management unit in HK.
In 2018, groups such as Evergrande, HNA, Fosun, Tomorrow Group and others whose global speculative undertakings could pose a systemic risk to China's financial system were classed as 'financial holdings' and have recently come under harsher regulatory scrutiny.
Chinese banking stocks have been under pressure ever since government regulators forced them in May to recognise additional classes of non-performing loans in anticipation of the rapid accumulation of NPLs in the aftermath of the Covid crisis.
Such enhanced regulatory scrutiny in combination with the fast resumption of economic growth since April will overall suffice to control potential systemic risk.
But as I noted above, the pause in the yuan's rise may stretch until there's greater visibility on the Evergrande type of problems.