China’s relaxation of capital controls could potentially spur a 13-fold jump in outstanding onshore yuan notes by 2020, according to Liu Linan, a rates strategist at the lender in Hong Kong.
International Finance Corp., the World Bank’s Washington-based financing unit, plans an offering this year after opening the panda market in 2005. Daimler AG, the first non-financial issuer, expects additional sales.
“Capital account liberalization will accelerate,” said Liu. “We will see more foreign investors coming in. We will see more market opening for foreign issuers.” China is lobbying for the yuan to be included in the International Monetary Fund’s basket of reserve currencies, and said June 11 it will support foreign issuers’ sales of bonds in the onshore market.
The bid to win that status has drawn opposition from U.S. senators with Charles Schumer and Lindsey Graham last week asking the IMF to deny it due to China’s “inability to adequately liberalize” capital flows.
Currency Politics
That criticism has little to do with the criteria for the IMF’s Special Drawing Rights and more to do with U.S. politics, according to Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia.
“While a meaningful step on the road to an open capital account, the internationalization of the Chinese bond market would not defuse the mounting anti-China political sentiment in the United States,” Roach said by e-mail.
Yuan assets held by overseas institutions and individuals rose to 4.41 trillion yuan as of April 30, from 2.88 trillion yuan on Dec. 31, 2013, central bank data show.
Foreign ownership of bonds jumped to 735 billion yuan from 399 billion, while for equities it surged to 644 billion yuan from 345 billion yuan. An IMF team is visiting China to explore operational requirements if the yuan is included in the SDR. This is one of many technical missions as the SDR review is underway, the IMF said in an e-mailed response to questions.
Turning Point
In China’s latest move to boost the currency’s global use, the central bank said in a June 11 report that it will “actively encourage” foreign central banks to include yuan assets in their reserves. It may also scrap limits on how much onshore securities they can buy, it said.
“The situation is changing,” Hua Jingdong, vice president and treasurer at IFC, said in a phone interview from Beijing.
“With China trying to join the Special Drawing Rights, China’s domestic capital market will be opened. We are very incentivized now to return to the panda market.” Financing costs onshore have fallen after three PBOC interest-rate cuts since November.
The average coupon of 2.59 percent on onshore yuan notes issued by corporations this year compares with 3.55 percent on offshore yuan notes in Hong Kong.
The government could encourage more panda issuance by allowing borrowers to register for sales instead of the current system in which they must get regulatory approval for each offering, according to Deutsche Bank’s Liu.
There are only five outstanding panda bonds totaling 7.63 billion yuan, dwarfed by the total 39 trillion yuan in the entire onshore debt market. Daimler alone accounts for 4.5 billion yuan of the panda notes outstanding.
“We see continued strong interest from Chinese investors and see good opportunities to place bonds,” Senol Bayrak, a spokesman for Daimler Greater China, said by e-mail. PBOC Governor Zhou Xiaochuan said in April China is making the yuan more freely usable in order for it to be included in the SDR.
Changes also include opening a market for short-term loans to foreign banks and allowing cross-border sales of funds.
“China is eager to join the SDR,” said IFC’s Hua. “To achieve that goal, China will need to fully open the capital account -- and the benefit of that will be that the onshore panda bond markets will also be open to foreign issuers and investors.”
bloomberg.com
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