Article / 26 May 2016 at 15:00 GMT

NDF Update: Chinese debt issues back in the frame

Saxo Markets
Editor's Note: Welcome to the first article in a new series on Non-Deliverable Forwards. NDFs, which involve no physical exchange of currencies, exist only in emerging markets and this series therefore focuses on China, Korea, Taiwan, India, Malaysia, Philippines, Indonesia and Brazil.


  • Funds' interest in buying USDCNH is linked to the current debt issues in China. Standard Chartered Bank economists say that despite the fact that deleveraging is high on the government’s agenda, the debt to GDP ratio is at 250%

  • Corporate debt – which is at more than 120% of GDP – is the key cause for concern with a lower profitability from state owned enterprises.

  • Official data shows an non-performing loans ratio of 1.75% at end-March, rising to 5.75% if "special-mention" loans are included. Major listed banks’ price-to-book ratio of roughly 0.7x implies an NPL ratio of 7-8%. The International Monetary Fund recently estimated that 15.5% of commercial banks’ loans to the corporate sector are potentially at risk. 

  • To solve this issue, SCB says that it would require disposing of bad debt, shutting down zombie enterprises, imposing hard budget constraints on SOEs, and improving banks’ lending practices. The cost of this approach, up to 10% of GDP, would be manageable given the relatively strong government balance sheet.

  • The Wall Street Journal has written an article saying that the Peoples Bank of China will change back the market-based mechanism of calculating the fixing to the old one when there were deciding themselves before the spot open. No confirmation yet.



  • The fixing was moved to the highest level since 2011 at 6.5693.

  • Technically we confirmed the break of the 100-day moving average after 3 months of trading in the same range which is significant. The main resistance is at 6.5760. 

  • It will be interesting to see if the high fix will be sustained but this would trigger more buying interest from NY funds. Locals have been selling forward points but less than before when the offshore interest disappeared a bit this week.

  • The forward points are not really reacting to the high fix and the spread CNH/CNY is still very low as you can see below.

USDCNH spot:

 Source: Bloomberg

CNH 12M points:
 Source: Bloomberg 

— Edited by Clare MacCarthy

Non-independent investment research disclaimer applies. Read more


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