Cheap yuan catapults China to second-biggest trade funding currency – Reuters

SHANGHAI/SINGAPORE, Nov 17 (Reuters) – Global companies have jumped into China’s bond market, issuing record amounts of renminbi-denominated bonds, borrowing heavily from mainland banks and It is taking advantage of rock-bottom renminbi interest rates as financing costs in the region soar.

Companies and banks are raising record amounts of cash through renminbi-denominated bonds issued in mainland China and Hong Kong, known as panda bonds and dim sum bonds, respectively.

A surge in borrowing from Chinese banks has made the yuan overtake the euro as the second-most used currency in global trade finance, providing a boost to Beijing’s ambitions to internationalize the currency.

Fiona Lim, senior currency strategist at Maybank, said the global rush to borrow from China was counterintuitive, as foreign investors were worried about geopolitical tensions and slowing growth in the world’s second-largest economy. He points out that this is happening while people are avoiding major powers.

“For Chinese investors looking for growth, the fundamental story is not attractive, but the weaker renminbi and lower interest rates will make borrowing costs much cheaper,” Lim said.

Foreign companies such as German automaker BMW (BMWG.DE) and Credit Agricole (CAGR.PA), as well as the overseas arms of Chinese companies, sold panda bonds in the January-October period for a record 125.5 billion yuan. ($17.33 billion). This was an increase of 61% compared to the same period last year.

Late last month, National Bank of Canada (NA.TO) raised 1 billion yuan by selling three-year Panda bonds with a coupon of 3.2%, a discount compared to the domestic interest rate of 4.5%.

Hong Kong’s dim sum bond issuance also hit a record high, rising 62% year-on-year to 343 billion yuan in the first eight months. The issuance of renminbi-denominated loans in the city also increased sharply.

For China, increasing the renminbi’s share in global finance has been one of its main internationalization priorities, but the recent surge in activity appears to have been overwhelmingly domestic.

“Panda bonds have steadily promoted the renminbi’s function as a financing currency,” the People’s Bank of China said in a report last month. It provided an incentive for banks to lend to offshore companies and allowed for greater use of the renminbi outside China.

According to SWIFT, the renminbi’s share as a global currency in trade finance rose to 5.8% in September from 3.91% at the beginning of the year, surpassing the euro for the first time. The international payments system governs the circulation of letters of credit, a form of short-term finance that facilitates trade.

In any case, it will only barely chip away at the dollar’s 84.2% advantage.

Several indicators of the internationalization of the renminbi, including the Standard Chartered Bank Tracker, which measures the renminbi’s global usage, and the Bank of China’s Cross-Border Renminbi Index (CRI), both hit record highs this year. Recorded.

it’s too early to celebrate

But analysts say it is too early to tout internationalization, pointing to the limited use and circulation of international renminbi bonds so far.

German automaker Volkswagen Group (VOWG_p.DE) told Reuters it would use the 1.5 billion yuan in proceeds from its first Panda bond solely for its domestic operations in China.

Mercedes-Benz Group (MBGn.DE) also plans to use the proceeds from the Panda bond to support its car leasing business in China.

Mark Williams, chief Asia economist at Capital Economics, said the internationalization of the renminbi is “less advanced than the headline numbers suggest.”

“More than half of all cross-border transactions using the renminbi are now between the mainland and Hong Kong. This is a very local form of internationalization.”

Maybank’s Lim agrees. “We should look at cross-border trade between China and Hong Kong and between China and other countries.”

The use of the renminbi in the trade finance and payments sector is mainly limited to China-friendly developing countries, such as those participating in the Belt and Road Initiative.

“The use of the renminbi for trade settlements is rapidly increasing, but only within certain bilateral routes such as Russia, Argentina, Pakistan and Nigeria,” Williams said.

Countries geopolitically aligned with the United States “have shown no desire to switch to the use of the renminbi, suggesting that the use of the renminbi in global trade will reach a low ceiling.”

(1 dollar = 7.2421 Chinese Yuan)

Reporting: Samuel Shen and Rae Wee Editing: Vidya Ranganathan and Kim Coghill

Our standards: Thomson Reuters Trust Principles.

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