By Jiaxing Li
HONG KONG, Dec 19 (Reuters) – Investors are snapping up yuan credits and surging yuan lending is poised to overtake overseas dollar loans at Chinese banks as attractive pricing helps drive a sustained push by Beijing to put the yuan on the global stage.
China’s overseas bank lending has tripled in four years to 2.52 trillion yuan and sales of onshore and offshore yuan debt are at or near records for the second year running.
Bankers say the boom is encouraged by cost, because yuan rates are low. But the market is also starting to generate its own momentum and a deepening pool of demand to own and spend yuan – a sign China’s drive to globalise the currency is making headway even without progress to liberalise capital accounts.
“I think this phase is now really more driven by fundamental interest in renminbi funding,” said Samuel Fischer, Deutsche Bank’s head of China onshore debt capital markets.
“There’s more and more international investors who don’t look at this just as an arbitrage, but who really have renminbi allocation and there are some very big anchor orders from outside China,” he said. “The dollar is at a critical juncture, and diversification is really happening.”
China has sought for years to promote the yuan as a currency for international trade and financing, and its share of global foreign exchange turnover has steadily climbed from a low base – reaching about 8.5% in April, according to the Bank for International Settlements. The dollar comprises 89% of turnover.
This year non-Chinese issuers raised 169.7 billion yuan ($24.10 billion) in onshore markets over the 11 months to end November, while a record 801.9 billion yuan was raised by all issuers in offshore markets, where demand was strong.
It’s a drop in the ocean of the record $9.57 trillion raised globally this year, according to Dealogic data, of which about $4.5 trillion was in dollars and $2.2 trillion in euros. But in the last three years the value of foreigners’ onshore and offshore issuance of yuan debt has more than doubled, China central bank data shows.
In the loan market, central bank data shows lending in foreign currencies – mostly dollars – fell to $375 billion at the end of November, from a peak of $587 billion in 2022, while the value of yuan lending hit $357 billion.
PRICE POINT IS BIG DRIVER
For issuers, the major driver is price.
Yuan funding costs have run below those of the dollar since 2022, as U.S. rates have climbed to curtail inflation and Chinese rates have fallen to try and stave off deflation.
The yield gap between the benchmark 10-year Chinese government bonds and U.S. Treasuries hit a high of nearly 315 basis points early this year and even Japanese 10-year rates are nearly 20 bps higher than China’s.
Three-year panda bonds were issued between 1.7% and 2.7% this year, far below the 3.5% yield on U.S. Treasuries for the same tenor, according to S&P Global.
“The yuan’s relative stability against the volatile U.S. dollar and euro further enhances this appeal, reducing exchange rate risks for foreign issuers by minimising the need for costly currency hedging,” the rating agency said.
But beyond the favourable financing conditions, “macro-political tensions and tariffs” are accelerating trade regionalisation and boosting demand for yuan liabilities, said Terence Lau, capital markets partner at Linklaters.
“One of the beneficiaries will be China and programmes like the One Belt One Road,” Lau said, referring to China’s infrastructure strategy, where cash can often be recycled to Chinese construction firms and paid in yuan.
Issuers such as Indonesia and the Development Bank of Kazakhstan raised so-called dim sum bonds in the offshore yuan market this year, with Indonesia raising 6 billion yuan in October and Kazakhstan 2 billion in September.
Kenya converted dollar-denominated railway-construction loans to yuan in October, while Ethiopia is in talks to do the same. And China Development Bank and the Development Bank of Southern Africa signed a deal this year, the first yuan-denominated financing cooperation.
“Kazakhstan has been actually doing more and more with China. So I think that drives the need for more renminbi because they actually have a real use for it, not just a financial funding,” said Lau.
DEFENSIVE MOVE AGAINST DOLLAR DOMINANCE
For investors, yuan credits offer a yield pickup over sovereign debt and somewhere to park capital since Asia’s debt markets have shrunk after China’s property downturn shut off borrowing from developers.
“Interest has been steadily rising from non-Asian, global fixed income investors as well, and should continue to do so,” said Florian Neto, head of investments for Asia at Amundi.
“Recent CNH bond deals have displayed strong order books, which will help encourage issuers both within China and abroad to consider CNH as a potential funding channel going forward.”
The currency’s carefully-managed stability is also an appeal, said William Xin, Asia fixed income portfolio manager at M&G Investments in Singapore, citing prospects of 4-5% unhedged returns.
To be sure, international yuan debts are worth about 0.2% of China’s domestic debt market and are tiny compared to dollar and euro debts.
A rising yuan, which is up about 3.6% on the dollar so far this year, can also be a negative for borrowers. However China has been diligent in keeping a lid on yuan gains, with state banks buying dollars to steady and smooth the currency’s moves.
“If that cautious stance were to change, it could slow or stop the growth in overseas lending. More likely, though, overseas renminbi lending will continue to increase to new highs,” said Wei He, economist at Gavekal Dragonomics.
And, analysts say, China is not necessarily seeking to dethrone the dollar, but rather to assemble the building blocks for a capital market outside the dollar system.
“China is engineering a process for shifting currency systems, not through grand pronouncements or by clashing with the dollar, but through thousands of procurement and payment decisions,” said Chi Lo, a global market strategist at BNP Paribas Asset Management in Hong Kong.
“This policy’s objective is not to topple the dollar but simply to ensure that the dollar-dominated system cannot be used against China; it is a defensive move.”
($1 = 7.0405 Chinese yuan renminbi)
(Reporting by Jiaxing Li in Hong Kong. Additional reporting by Reuters Shanghai Newsroom. Editing by Tom Westbrook and Shri Navaratnam)
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