Corporate China is short US Dollar27 June, 2012, 10:52. Posted by Zarathustra
Lately, an interesting research from Standard Chartered shows that corporate China is short US Dollar. Perhaps that sounds a bit surprising, but it makes sense if the Chinese Yuan was expected to go up while the US dollar is expected to go down, which has been the case for the best part of the last 2 or 3 years, and that expectation has not gone until relatively recently (although we have been suggesting a possible depreciation of Chinese Yuan since late last year as the economy slows)
Essentially, Standard Chartered is suggesting that while corporate China have to sell US dollar whenever they receive their payments in US dollar, the data suggests that they are selling a lot more US dollar than the trade surplus data suggest that they should, thus they seem to have been building up a net short position in US dollar. Or in other words, they borrow US dollar (how so?).
Do note that StanChart is aware of the potential inaccuracies on these numbers (and we noted that the trade figures could be very inaccurate in Chinese statistics), thus it is not certain how large this net short position is, or indeed whether the Corporate China is really that short in US dollar. However, if this is indeed the case, a deleveraging of the short US dollar position due to an expectation of a depreciation of Chinese Yuan and appreciation of US dollar (which are both happening) would mean a lot of US dollar buying.
If corporate China was deleveraging this position, we would see a lot more USD buying in the onshore FX market and much more CNY weakness. We believe setting off such a deleveraging process is something the People‟s Bank of China (PBoC) would very much prefer to avoid (more on this below). However, the data suggests that corporate China kept its position more or less stable during the January-May period.
The chart below from Standard Chartered illustrates the point:
Source: Standard Chartered