(Bloomberg) — China has surpassed the United States in corporate bond transactions in its yuan-denominated credit market in recent months, a rare move that underscores the growing impact of the two countries’ divergent monetary policies.
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Issuance of yuan-denominated bonds by non-financial companies surpassed the dollar in July and August, the first in two consecutive months, according to data compiled by Bloomberg. Momentum has started to build since the Federal Reserve began its tightening cycle in March: sales of yuan banknotes, almost entirely by Chinese companies, totaled 2.04 trillion yuan ($306 billion based on US exchange rates). time of business) between April and August. against $283 billion in dollar-denominated debt worldwide.
The change in the credit market landscape is primarily a result of a drop in dollar debt sales after the U.S. central bank embarked on a relentless campaign to fight inflation, while Beijing has been doing the opposite to keep funding costs low. for a struggling economy. A weakening yuan also bodes well for the trend, even if it dilutes the dollar value of local bonds.
But given the still minimal foreign exposure to corporate yuan banknotes, the latest development remains a reminder of the size and weight of China’s economy rather than its currency’s international popularity, at least for now.
“The yuan’s corporate debt rise reflects the divergence in monetary policy between the US and China and, more importantly, liquidity is king,” said Gary Ng, senior economist at Natixis SA. “But the yuan is still a long way from challenging the dollar’s supremacy, as most yuan bonds are still issued by Chinese companies.”
As the Fed continued to raise interest rates, US dollar corporate bond sales fell about 40% to an 11-year low of $592 billion this year on Sept. . In contrast, the issuance of yuan banknotes fell by about 6%.
Until this year, it was rare for corporate bond issuance in yuan to outpace the dollar for an entire month, and the few cases where it occurred mostly in December due to the Christmas-induced lull.
Buffering China’s local credit market has been Beijing’s efforts to salvage an economy crippled by a strict Covid Zero policy and an unprecedented housing crisis. Authorities cut key interest rates and kept the financial system awash with cash, allowing many companies to sell bonds at the cheapest cost in more than a decade.
Meanwhile, a record wave of developer defaults and a weakening yuan have made the dollar-debt market less accessible or attractive, even for some of China’s strongest companies, giving them added incentives to return home in search. of funding.
However, total dollar debt issuance is still higher than its yuan counterpart for the year and it remains to be seen whether Chinese sales can keep pace in coming months. Signs also began to emerge that the increased clarity of the Fed’s policy path had persuaded more borrowers to accept the new reality of higher dollar interest rates.
Opening up its huge domestic bond market was one of Beijing’s most tangible and successful liberalization efforts in recent years, with the inclusion of Chinese debt in the world’s major indices, bringing hundreds of billions of dollars from foreign central banks into endowments. university students. funds.
That said, global investors have mostly deposited their money in sovereign bonds or those of Chinese policy banks, showing continued reluctance to hold local corporate debt amid concerns about an opaque legal system and less reliable onshore credit ratings.
And despite the government’s efforts to promote the yuan-denominated panda bond market, it remains dominated by offshore entities of Chinese companies, with genuine foreign issuers such as the Asian Development Bank and the Polish government being in the tiny minority.
“Credit investors are not afraid of default,” said Jenny Zeng, co-head of Asia Pacific fixed income at AllianceBernstein. “But the challenge in China is that the debt restructuring process after the default is not transparent enough.”
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