Can Asia beat the rising-dollar curse? The question is far from academic considering the central role that a strengthening U.S. currency played in sparking the region’s 1997 crisis, as well as Latin America’s own financial woes a decade earlier. When the dollar slides, liquidity flows into emerging markets, pumping up growth and assets. As the dollar rallies, it can act like a gargantuan money magnet drawing much-needed investment away from the developing world.
With the dollar now experiencing what many observers believe may be its third “super-cycle” rally in 30 years, emerging markets have reason to worry. Since the 2008 global crisis, outstanding dollar-denominated credit to non-bank borrowers overseas has surged to $9 trillion from $6 trillion, according to the Bank for International Settlements. (That figure is roughly equivalent to China’s annual economic output.) Chinese companies alone owe at least $1.1 trillion.
In emerging economies with volatile local currencies such as India and Malaysia, issuing debt in dollars can be a smart and pragmatic strategy — until it isn’t. With the dollar up sharply almost across the board since the start of 2014 — 23 percent versus the euro and 13 percent versus the yen — and the Federal Reserve set to raise rates, borrowers are going to have a harder time paying back what they owe, let alone taking out new loans. That helps explain why the Shenzhen property developer Kaisa is suddenly making global headlines. It may soon be the first Chinese company to default on dollar bonds — and could set off a domino effect across Asia’s biggest economy.
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