Daily Management Review

China Has Become The Second-Largest Trade Funding Currency Due To The Cheap Yuan


China Has Become The Second-Largest Trade Funding Currency Due To The Cheap Yuan
International businesses are swarming China's debt markets, where they are taking advantage of historically low yuan interest rates to offset rising funding costs by issuing record numbers of bonds denominated in yuan and borrowing large sums from mainland banks.
Panda and dim sum bonds, which are yuan bonds issued in mainland China and Hong Kong, respectively, are helping businesses and banks raise record amounts of capital.
Beijing's efforts to internationalise the yuan have been bolstered by the sharp increase in the amount of money they are borrowing from Chinese banks, which has propelled the yuan past the euro to become the second-biggest currency used in international trade finance.
Global investors are avoiding the second-largest economy in the world due to geopolitical tensions and slow development, which makes the desire to borrow money from China seem illogical, according to Fiona Lim, senior FX strategist at Maybank.
"While the fundamental story is not compelling for Chinese investors looking for growth, the depreciation of the yuan as well as the rate cuts result in a much cheaper cost of borrowing," Lim said.
During the January–October period, foreign corporations, including German automaker BMW and Crédit Agricole S.A., as well as overseas branches of Chinese companies, sold panda bonds to generate a record 125.5 billion yuan ($17.33 billion), a 61% increase from the same period last year.
By selling a three-year panda bond late last month at a 3.2% coupon—a steal compared to rates of 4.5% at home—the National Bank of Canada (NA.TO) raised one billion yuan.
Hong Kong's dim sum bond issuance also reached a record high, rising 343 billion yuan in the first eight months, or 62% more than the same period last year. In the city, loans denominated in yuan also increased dramatically.
One of China's top internationalisation goals is being met by the yuan's increasing percentage in global funding, even though the majority of the recent surge in activity seems to have been for domestic purposes.
The People's Bank of China (PBOC) stated in a report from last month that "Panda bonds are steadily promoting the renminbi's function as a funding currency". It has encouraged banks to lend to foreign companies and permitted the use of yuan outside of China.
According to SWIFT, the yuan's percentage of all currencies used in trade financing increased to 5.8% in September from 3.91% at the beginning of the year, surpassing the euro for the first time. Trade-facilitating short-term finance in the form of letters of credit is dominated by the international payments system.
Still, at 84.2%, it just about trails the dollar in domination.
This year saw record highs for a number of yuan internationalisation indicators, including the Bank of China's Cross-border RMB Index (CRI) and a Standard Chartered Bank tracker assessing the usage of the yuan worldwide.
It's premature to herald internationalisation, analysts argue, pointing to the restricted usage and circulation of international yuan bond profits thus far.
Volkswagen Group, a German carmaker, informed the media that its first 1.5 billion yuan panda bond profits will exclusively be used for its onshore China operations.
The Mercedes-Benz Group also intends to fund a car leasing company in China with the proceeds from its panda bonds.
Internationalisation of the yuan "isn't going as well as the headline figures might suggest," according to Capital Economics' chief Asia economist Mark Williams.
"It's still the case that more than half of cross-border transactions using the yuan are between the mainland and Hong Kong. This is a very local form of internationalisation."
Lim of Maybank concurs. "We should be discerning of the cross-border transactions that are between China and Hong Kong versus China and the rest of the world."
The use of the yuan in trade financing and payments is mainly restricted to developing nations that are friendly with China, such as those that join its Belt and Road programme.
"There has been a surge in use of the yuan to settle trade, but only within specific bilateral channels: countries like Russia, Argentina, Pakistan and Nigeria," Williams said.
Governments that support the United States strategically "are demonstrating no inclination to convert to the use of the yuan. This implies that there will be a modest ceiling on the usage of the yuan in international trade."