[NEW YORK] Years of the Chinese yuan practically pegged to the US dollar gave succor to a massive carry trade that involved mainland speculators borrowing from overseas banks at relatively low rates and then investing in higher-yielding renminbi-denominated assets.
Pocketing the spread between the two netted hefty returns, but the era of "peak" China carry looks to be coming to an end following China's move to devalue its currency.
The carry trade is unknown, the Bank for International Settlements estimates that dollar borrowing in China jumped five-fold since 2008 to reach more than US$1.1 trillion. Global dollar borrowing is something like US$6 to 9 trillion, according to the BIS, thanks largely to an emerging market borrowing spree.
Trade unwind will now depend largely on the pace of the dollar's appreciation. It's doubtful that Chinese authorities want to see a disorderly unwind of any sort.
The flipside is that China still has some pretty impressive foreign exchange reserves, which could soften the blow from an unwind of the carry trade. The devaluation may also have the added benefit of taking some of the froth out of a Chinese market that has arguably been overheated by foreign borrowing.