"Since 2005, there's this implicit assumption on the part of corporate CFOs in China that the renminbi is a one-way ride, that it's going to appreciate relative to the dollar," said Teresa Kong, portfolio manager at Matthews Asia, an Asia-only investment firm with about $30 billion under management. "That has caused a moral hazard, this idea that the cost of capital is a lot lower than what it really is."
Dollar-denominated borrowing has been on the rise in the Chinese corporate sector, said Patrick Chovanec, managing director and chief strategist at Silvercrest Asset Management. Those companies with dollar debt will now find it more costly to service their obligations, and that could create repercussions across the country's economy, experts said.
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Debt is "obviously a big issue," Wells Fargo Funds Chief Portfolio Strategist Brian Jacobsen told CNBC, explaining that small companies with weak balance sheets will get squeezed the hardest. Banks, he added, have been extending credit to those firms, so the entire financial sector may feel some repercussions, which could "create a cascade of problems."
Varied figures exist on how much dollar-denominated debt Chinese companies are holding. Nomura estimated in a Thursday note that total Chinese external liabilities amount to roughly $1.135 trillion—comprising approximately $729 billion in international bank loans and about $405 billion in bond issuance—although it is difficult to know the denomination breakdown of these obligations.