Country Garden's property debt woes contribute to Chinese yuan's drop to 9-month low

By Isabel Wang

We are only seeing 'the tip of the iceberg' of what is going on in China, says Jefferies' Bechtel

The Chinese yuan fell to its weakest level since November on Monday on mounting concerns about the country's debt-laden property sector.

Country Garden, the largest privately-owned developer in China, missed international bond payments last week and suspended trading in nearly a dozen of its onshore bonds on Monday, adding to speculation that the company may be preparing to enter a debt restructuring.

The yuan traded at 7.28 per dollar on Monday, hovering at its weakest level since early November, according to Dow Jones Market Data. The currency has now tumbled over 5% in 2023 as China's much-anticipated economic rebound after its emergence from zero-COVID policies has yet to fully materialize

Country Garden Holdings Co. announced in stock exchange filings Sunday that it suspended trading in at least 10 of the company's corporate bonds, days after the property developer said it has not paid interest payments on two international bonds due on August 6, totaling $22.5 million, while expecting to report a multibillion-dollar loss for the first half of 2023.

Shares of Country Garden slumped 18.4% in Hong Kong trade on Monday, after finishing off a difficult week that saw its shares drop 31%, according to FactSet data.

See: 'Years to recover.' Country Garden shares slump 18% after Morgan Stanley downgrade, bonds suspended

Meanwhile, one of China's top wealth managers missed payments on multiple high-yield products, putting a fresh spotlight on the $2.9 trillion trust industry as investors are on edge over the health of China's economy and financial markets.

Two clients of Zhongrong International Trust Co. Ltd. announced on Friday that Zhongrong failed to repay maturing trust products they had purchased. Zhongrong's key shareholder is the financial conglomerate Zhongzhi Enterprise Group, which manages about $138 billion.

China's banking regulator has set up a task force last month to examine risks at Zhongzhi, according to Bloomberg, citing people familiar with the matter.

"There seems to be a lot going on underneath the hood in China financial markets these days with Country Garden and Zhongzhi the two most prominent," said W. Brad Bechtel, global head of FX at Jefferies. "The gist I get is that we are only seeing the tip of the iceberg."

Bechtel said the more days that go by without a comprehensive fiscal stimulus plan, the more it looks like there may not be one. "What is also clear is that there are a myriad of debt-related issues that are popping off just now, and that we know very little about what is actually going on underneath the hood there," he wrote in a Monday note.

See: Wall Street's crystal ball is broken: Why financial markets' big bet on China's economic boom is going all wrong

The People's Bank of China, or PBOC, on Monday set the onshore yuan reference rate at 7.1685, versus the previous fix of 7.1587 and market expectations of 7.2461.

The PBOC controls the yuan's rate on the mainland by setting a so-called daily midpoint fix, based on the currency's closing level in the previous session and quotes from interbank dealers. The offshore yuan, however, has no restrictions on its trading range.

Since the PBOC "relentlessly fixes the daily fixes" below market estimates, the result has been that the fix has "increasingly less and less effect," said Bechtel. "In fact, the daily fixes are all but ignored by the market most days," he said, adding that the onshore yuan "would be a lot higher if they weren't doing this, but there is almost no impact from these daily fixes any more in the day-to-day price action.

"The market, in other words, doesn't take anything from this," he said.

While the yuan has slid, other peers also fell against the greenback on Monday. The Russian ruble plunged to its lowest level against the dollar in more than 16 months on Monday as blowback related to President Vladimir Putin's invasion of Ukraine continued to weigh on the currency. The Japanese yen weakened to breach the key psychological 145 mark against the dollar on Monday, the first time since November 2022, according to FactSet data.

The ICE U.S. Dollar Index DXY, which tracks the U.S. dollar's performance against a basket of rivals, rose 0.2% to 103 on Monday, near the peak that was reached back in early July as investors sought a haven due to concerns about China's economy.

U.S. stocks ended higher on Monday after booking back-to-back weekly losses. The S&P 500 SPX rose 0.6%, while the Dow Jones Industrial Average DJIA was nearly flat and the Nasdaq Composite COMP advanced 1.1%.

-Isabel Wang

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08-14-23 1618ET

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