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Evergrande’s Fateful Week, China Holidays Put Yuan in Spotlight

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·3 min read
Evergrande’s Fateful Week, China Holidays Put Yuan in Spotlight
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(Bloomberg) -- The offshore yuan -- the exchange rate for China’s currency trading outside of the country -- is garnering the attention of investors around the world.

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Fallout from a potential default by China Evergrande Group hit Hong Kong stocks and the downbeat tone is weighing on markets around the world on Monday, but with mainland Chinese markets closed for holidays, the offshore currency will be a key focus.

The offshore yuan has lost 0.9% over the past three days to trade at 6.4844 per dollar as of 7:36 a.m. in New York, primarily due to a stronger U.S. dollar and selloff in emerging-market peers. The currency extended declines past its 50- and 200-day moving averages, and strategists at Mizuho Bank Ltd. see it weakening this week to 6.50 per dollar, a level last seen on Aug. 23.

Major banks were already told by Chinese authorities that they won’t receive interest payments due on Evergrande loans on Monday. It is also unclear whether Evergrande intends to pay about $84 million of dollar-bond interest due Thursday, Sept 23.

Policy makers and businesses alike are preparing for potential market contagion. The People’s Bank of China on Friday added $14 billion (90 billion yuan) of funds on a net basis through repo agreements, the most since February, in a bid to avert any funding squeeze.

Agricultural Bank of China, among the big-four state-owned lenders, made bad-debt provisions for its Evergrande exposure, according to Reuters. Banks are readying themselves for a liquidity squeeze, part of the reason why they are dumping dollars in onshore swap markets, leading to tight liquidity conditions in the onshore yuan, some analysts say.

A staggered holiday schedule in mainland and Hong Kong markets further complicates matters. All onshore financial markets will be closed on Monday and Tuesday, though Hong Kong markets will stay open. On Wednesday, onshore markets will resume trading yet Hong Kong will go on holiday.

Here’s a list of Evergrande debt events and market schedules for the week ending Sept. 24:

  • Monday, Sept. 20: All onshore China financial markets are closed and all markets in Hong Kong are open. Evergrande shares lost as much as 19% and closed 10% lower. The offshore Chinese yuan trades throughout the day, though traders won’t have a PBOC daily fixing as reference.

  • Tuesday, Sept. 21: All onshore financial markets stay closed and all markets in Hong Kong remain open. Evergrande stocks and dollar bonds continue to trade in Hong Kong. Offshore Chinese yuan trades throughout the day, in absence of a PBOC daily fixing for a second session.

  • Wednesday, Sept. 22: All onshore financial markets reopen and all markets in Hong Kong close. Trading in Evergrande stocks and dollar bonds will take a break. The offshore Chinese yuan trades throughout the day together with its onshore counterpart, though the Hong Kong holiday may lead to substantially lower volumes and worse liquidity conditions that day.

  • Thursday, Sept. 23: All markets in mainland China and Hong Kong will open. Evergrande will decide whether or not to pay interest due on its dollar bond.

(Adds market context in second paragraph, updates prices in third.)

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