Sinking yuan may drag down banks

By Christopher Langner

Traditional theory says a cheaper currency should be good news for an export-dependent nation that's losing ground to lower-cost rivals. That doesn't apply in China's case, and its banks could be next to suffer the consequences. Investors have good reason to worry as debt continues to explode and money keeps flowing out of the country . On Tuesday , the People's Bank of China set the yuan fixing at the lowest since September 2010. In other circumstances, depreciation might be expected to stimulate export manufacturing and attract overseas capital. That won't be the primary effect here. Instead, Chinese savers will get even more spooked that the value of their funds is dropping in dollars and will seek to move more money out of the country .

Outflows, in turn, will further weigh on the yuan in a vicious cycle that could have serious effects on China Inc, especially given that the country's corporations have taken on record amounts of foreign currency debt. This year alone, dollarand euro-denominated loans taken out by Chinese companies have reached $195 billion, bringing the total outstanding to about $650 billion. That's equivalent to the total amount of subprime mortgage loans outstanding in the US in 2008.

Foreign currency losses were already a major topic for publicly traded Chinese companies.