Offshore yuan notes have reached a record issuance, as foreign borrowers take advantage of China’s lower rates. That’s as the country’s slumping economy has pressured China to ease its monetary policy. So far this year, $10.4 billion worth of so-called panda bonds have been issued in China by offshore borrowers. Loading Something is loading.
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China’s monetary easing is attracting foreigners looking to borrow yuan at relatively lower rates, helping globalize the currency.
According to Bloomberg, international borrowers have issued around $10.4 billion worth of “panda bonds” in 2023, a form of offshore yuan notes that remain within China’s domestic interbank market. This year’s issuance of panda bonds marks a new high, surpassing the prior record of $10.2 billion for the same year-to-date span set in 2021.
It’s the indirect result of a slumping Chinese economy, which has motivated the country’s central bank to introduce interest rate cuts this month.
That has induced foreign borrowers like the Mercedes-Benz Group and the Hungarian government to take advantage of China’s lower rates.
But the popularity of these bonds is also helping increase the yuan’s internationalization. It follows Beijing’s efforts to boost the currency’s use globally and erode the US dollar’s dominance in trade and central bank reserves.
Meanwhile, monetary policy has remained hawkish in developed markets, with the European Central Bank recently increasing interest for the eighth time. And while the US Federal Reserve has skipped a hike in June, it indicated the possibility of two more hikes this year.
Due to this, the yield gap between US and Chinese 10-year bonds is at its widest since November, at 119 basis points.
In addition, relaxed policies around the use of panda bonds have resulted in greater adoption, such as last year’s reform that offered issuers a choice between holding onto the proceeds in China, or transferring them abroad. Other rules have looked to make the debt’s issuance more transparent and efficient.
But the yuan’s recent exchange-rate slide may cause borrowers to keep more of the proceeds from the bonds within Chinese markets, Bloomberg said.
That’s as the yuan fell to a seven-month low against the dollar earlier this week as China’s post-pandemic economic rebound has fizzled. Recently, S&P Global downgraded its 2023 and 2024 growth forecasts for the country.