(Bloomberg) -- The offshore yuan -- the exchange rate for China’s currency trading outside of the country -- is about to become the center of attention in financial markets around the world.
The offshore currency is one of the few Chinese assets that trades around the clock, meaning it will come under scrutiny from investors bracing for any fallout from a potential default by China Evergrande Group on Monday. Other options to assess contagion will be limited due to holidays that will close trading in China and Hong Kong during the week.
The offshore yuan lost a total of about 0.7% on Thursday and Friday, primarily due to a stronger U.S. dollar and selloff in emerging-market peers. The currency now trades near its 50-day moving average of around 6.4696 per dollar and may extend its weakening to test the 200-day moving average at 6.4737 if market sentiment worsens on Evergrande. A breach of the 200-day average opens up a path toward 6.50 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 stocks and dollar bonds trade in Hong Kong, with a default on its bank loans expected. 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 Evergrade 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.
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