Markets

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

The investment community has long known the perils of mixing perusal of an Albert Edwards' prediction with enjoyment of hot beverages. Yet, the Societe Generale strategist did manage to leave investors choking on their coffee with his most recent forecast: a 75 percent collapse in the S&P 500 Index from its recent peak. What will usher in this ``Ice Age'' for global equity markets, according to the doomsayer, is a big downward move in the yuan, which will mean global deflation and recession.

Could Edwards be right? There's some $1 trillion of evidence that Chinese companies are indeed preparing for their currency to decline. But instead of supporting his conclusion, the proof might work against it.

The amount of yuan-denominated securities sold by companies in China jumped by $995 billion last year versus 2014. Round that to $1 trillion.

Home Is Where the Borrowings Are
Chinese companies' local-currency securities sales jumped by $1 trillion in 2015
Source: Bloomberg

Now do the rest of the math: Between now and the end of 2018, these companies need to repay or refinance about $140 billion of U.S. dollar-denominated bonds, and another $36 billion of debentures sold in other foreign currencies. Next, assume a highly improbable 50 percent drop in the yuan's value, so offshore debt repayment swells from $176 billion to $264 billion in local-currency terms. Contrast this burden with the $1 trillion cushion they created last year for just this eventuality, and it's unlikely a weak yuan is going to be a showstopper for China. Of course, the increase in onshore debt issuance comes with its own set of problems, especially since many Chinese companies are already in an unenviable situation of being highly leveraged in a slowing economy. Still, with less reliance on foreign-currency liabilities, the corporate sector as a whole should be able to ride out a devaluation storm.

Shunning Foreign-Currency Risk
U.S. dollar-denominated debt issuance by Chinese companies fell last year

At least superficially, this seems to suggest policymakers in Beijing may be less than terrified of extending the 5.6 percent decline in the yuan since just before last year's Aug. 11 shock devaluation. The other traditional argument against a weaker currency is that it could be inflationary. But given consumer prices rose only 1.6 percent from a year earlier in December, and producer prices have been declining for 46 straight months, a little bit more inflation would be good for China.

So far, Edwards' argument holds. However, just because Chinese authorities have more wiggle room doesn't mean they'll reach for all-out devaluation. The brutal sell-off in global assets, stoked by the sudden weakness in the yuan in early January, will serve as a reminder that a beggar-thy-neighbor exchange-rate policy won't really work. The global recession Edwards is worried about will negate any competitive advantage Beijing might hope to secure for its exporters.

As Bloomberg News reported earlier this month, companies including China SCE Property, China Eastern Airlines and Spring Airlines are retiring their dollar debt early. The mainland's property developers, which were barred from offering securities locally before curbs were relaxed in 2014, raised more than six times the amount selling yuan bonds onshore last year than they netted from hawking U.S. currency notes.

All that makes the Chinese corporate sector's $1 trillion bet on a weaker yuan more of an insurance policy -- not a preference for currency debasement. The Ice Age Edwards warns of isn't in China's interest, and that considerably reduces the likelihood of his dire prediction coming true.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net