Bank of China Sees Yuan Emerging as Global Financing Currency

Global issuers are increasingly keen to sell yuan bonds to take advantage of the low rates, setting up the currency to be a potential financing vehicle, according to the top underwriter of such notes outside of China.

(Bloomberg) — Global issuers are increasingly keen to sell yuan bonds to take advantage of the low rates, setting up the currency to be a potential financing vehicle, according to the top underwriter of such notes outside of China.

Dim sum and panda bonds — yuan debts sold outside China and within the country respectively — will reach new highs of scale as the spread with the US widens, said Liu Lin, deputy general manager of investment banking at Bank of China Ltd. He estimated the issuance of offshore yuan notes will rise to a record 500 billion yuan ($68.4 billion) this year and that of panda bonds to grow 50% next year after expanding at a similar pace in 2023.

“Institutions around the world are expressing strong willingness to sell yuan bonds now,” Liu said in an interview, adding the financing opportunities in the currency have significantly increased.

As the monetary policies of China and other major economies diverge, the cost of yuan bonds continues to fall. The yield on benchmark 10-year government note is at the biggest discount to a comparable Treasury bond since 2006. This has prompted overseas companies to sell 124 billion yuan of bonds in China’s domestic market this year, less than 5% off the 2016 record. Talk of the yuan becoming a low-cost alternative to the yen has surfaced recently.

Offshore yuan bond sales so far this year have already hit a yearly record 440 billion yuan, according to data compiled by Bloomberg.

At a time when foreign issuers continue to dump onshore bonds, “more foreign issuers may also help attract international investors” to the domestic market, Liu said.

Longtime investors in dollar or euro bonds of a specific issuer will naturally invest in bonds of the Chinese currency from that same issuer, Liu said. For instance, Deutsche Bank AG issued 1 billion yuan of three-year bonds for the first time at the beginning of the year, with a coupon of 3.21%. The coupon of 550 million euro in bonds issued the same month, which can be redeemed as early as 2028, reached 5.375%.

What Bloomberg Intelligence Says…

“While it’s early days, we think China’s domestic yuan bond market will become one of the key pillars for international fundraising in the coming 2-3 years, tracking the yuan rise in use for trade settlement.”

— Timothy Tan and Jason Lee

Read the full report here

Still, not all aspects of yuan bonds may be attractive to investors. Panda bonds are subject to the management of China’s financial regulatory authorities on their issuance pace and outbound fund remittance. And at a time when the exchange rate is under pressure, foreign institutions will still face regulatory obstacles if they try to conduct large-scale interest rate arbitrage transactions with domestic yuan, similar to the Japanese yen.

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