YICAI | Chinese Yuan Becomes Funding Currency Amid China's Low Interest Rates
(Yicai) Nov. 27 -- The low interest rates in China have propelled the Chinese yuan to a funding currency despite the redback's exchange rate against the US dollar weakening and foreign capital flowing out of the domestic stock and bond markets this year amid the large interest rate spread between the treasury bonds of the Asian country and the US.
Sales of so-called panda bonds, yuan-denominated notes sold by foreign issuers in the Chinese mainland, have also climbed to a record this year thanks to the yuan becoming a funding currency.
Seventy-three panda bonds worth more than CNY126.4 billion (USD17.7 billion) had been sold in China as of Oct. 12, up 62 percent from a year earlier, data from Wind Information showed. By comparison, the 52 bonds issued in the whole of last year raised CNY85.1 billion (USD11.9 billion).
The main driver was the lower financing costs of yuan-denominated bonds compared to US dollar-denominated bonds as the interest rate spread between treasury bonds of China and the United States widened, Zhong Wenquan, deputy managing director of Moody's Investors Service, told Yicai. Given that the spread still exists, the US credit ratings giant expects the trend to continue, Zhong added.
The trend has undoubtedly boosted the internationalization of the redback. The yuan surpassed the euro as the second most popular currency for trade finance in September, accounting for 6 percent, according to data from leading global interbank settlement organization SWIFT.
Panda bonds have boomed amid low financing costs in China this year, Samuel Fischer, head of debt capital markets at Deutsche Bank, said to Yicai recently. The German multinational investment bank issued 25 bonds in the local market this year, 20 percent of which were panda bonds, he added.
The spread is not the only reason for the boom of panda bonds, as optimizing market measures is also key, Fischer noted. The People's Bank of China, the country's central bank, issued a document last December to no longer impose restrictions on the outward remittance of funds raised by panda bonds, he pointed out, adding that this is conducive to attracting foreign issuers with different purposes of funds to enter the panda bond market.
Panda bonds can promote the internationalization of the yuan, Fischer said. As a financing tool for multinational enterprises, the redback's use on the liability side will also promote its overall use, he added.
Some offshore enterprises use the US dollar as the currency of denomination because the supporting services are complete, meaning that it can be advanced through issuing bonds whether to manage global trade settlement balance or to invest on the asset side, according to Fischer.
Editor: Martin Kadiev