Early Redemption of USD Debts: Cause and Effect

The RMB against the USD fluctuated sharply in early August this year, and both offshore and onshore RMB exchange rates have broken the market of seven. Driven by the depreciation of the RMB exchange rate, property developers' financing costs could also rise, prompting some to redeem their US dollar debts in advance. Market news pointed out that due to fluctuations in the exchange rate, the dollar debts redeemed by developers in recent months totalled more than US$1 billion, accounting for 1.7% of the total issuance of US dollar debt in the first seven months of this year. Additionally, in view of regulations on the use of overseas debt in the domestic business, some developers have chosen to redeem their debts early in order to reduce the policy risk.

In the short run, since the amount of US dollar debts to be matured during the year is not large, it is expected that the short-term impacts of exchange rate fluctuations in recent months will still be manageable. In fact, overall property prices are greatly affected by factors such as economy, policy, supply and demand, suggesting that the impact of RMB exchange rate changes on housing prices is still limited. However, it is worth noting that the maturity of developers' overseas debt in 2020 amounts to close to US$30 billion, 25.3% higher than that in 2019. In the long run, and in the context of exchange rate fluctuations, apart from the early redemption of US dollar debts, some property developers also choose to optimise their debt structure and extend their debt duration to strengthen their financial position. In addition, mainland property developers could still use overseas financing to extend the repayment, in order to reduce the amount of exchange losses sustained, or even directly arrange exchange rate swaps for their foreign currency loans.