China Opening Its Capital Markets And Currency To The World

Bloomberg reports that Credit Suisse selling Chinese bonds shows markets opening up.

(emphasis mine) [my comment]

Credit Suisse Selling Chinese Bonds Shows Markets Opening Up
By Tom Kohn and Bryan Keogh
April 8, 2009 17:30 EDT

April 9 (Bloomberg) -- President Barack Obama can look to China's corporate bond market for evidence Premier Wen Jiabao is opening up his currency to the world.

Sales of non-financial bonds rose to a record 199 billion yuan ($29.1 billion) this year, making it the third most popular currency for company debt behind the U.S. dollar and euro. The market overtook offerings in Japanese yen for the first time after being ranked sixth in 2007, according to data compiled by Bloomberg.

During last year's presidential campaign, Obama said in a letter to the National Council of Textile Organizations that Chinese "manipulation" of the yuan creates a reliance on exports that hurts the U.S. and global economies. While denying the charge, China in December promised to open capital markets and is also easing rules limiting foreign banks' role in bond sales and trading.

"A sizable and vibrant domestic corporate bond market is a precondition" for the yuan to become an international currency, said Shang-Jin Wei, professor of Chinese business and economy at Columbia University's Graduate School of Business in New York.

While attacking the dollar's dominant role in global finance, China is boosting its currency by bolstering the corporate bond market and making it easier to do business in yuan.

Since November, the world's third-largest economy has set up 650 billion yuan in so-called currency swaps to help importers in Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea avoid having to pay dollars for Chinese goods.

'Hugely Liquid'

Record bond issuance and loosened regulations have persuaded at least six overseas investment banks, including New York-based Goldman Sachs Group Inc. and UBS AG of Zurich, to start underwriting local-currency debt.

"It's a hugely liquid market," said Joseph Chee, head of capital markets at UBS Securities Co. in Beijing, who forecasts securities sales, including those of corporate bonds and short- term paper, will jump about 50 percent to 1 trillion yuan this year. "It will continue to grow."

The pace of expansion provides "a striking contrast between the health and growth of financial markets in China and the condition of markets in the West, which are still struggling [on life support]," said Mark Williams, an economist at London-based Capital Economics Ltd. who advised the U.K. Treasury on China from 2005 to 2007.

China is using a 4 trillion-yuan stimulus plan to bolster capital markets by encouraging infrastructure spending and boost growth above last quarter's 6.8 percent, the weakest in seven years. That's attracting European and U.S. banks as they grapple with recession at home and $1.25 trillion of losses and writedowns triggered by the collapse of the mortgage market.

State Support

The $256 billion of Chinese corporate notes outstanding are dwarfed by $1.96 trillion in government debt as of Dec. 31 [Notice how government debt is less than China's 2+ trillion foreign reserves.], according to the Asian Development Bank.

China's currency has gained 21 percent against the dollar since a fixed peg to the greenback was scrapped in 2005.
The country's central bank now manages the yuan against a basket of currencies, including the dollar, euro and yen.

The yuan traded at 6.84 to the dollar yesterday.

Government support for state-controlled banks, the yuan's managed exchange rate and regulations curtailing foreign companies from buying or selling local securities are limiting growth in the corporate debt market, according to Nicholas Lardy, an economist specializing in China at the Peterson Institute for International Economics in Washington.

'Super-Sovereign'

Still, Wen has ambitions to play a bigger role in global financial markets. While stopping short of promoting the yuan as a replacement for the dollar, Central bank Governor Zhou Xiaochuan said in March that the International Monetary Fund should create a "super-sovereign reserve currency."

Zurich-based Credit Suisse Group AG and Deutsche Bank AG of Frankfurt won licenses for joint ventures with Chinese securities firms since December, joining Goldman Sachs, Morgan Stanley, UBS and CLSA Asia-Pacific Markets in starting local partnerships.

The $29.1 billion of yuan-denominated company debt issued this year compares with bond sales of 16.6 billion pounds ($24.4 billion) and 1.79 trillion yen ($17.9 billion), Bloomberg data show.

Dollar-denominated debt sales totaled $201 billion while offerings in the European currency reached 109 billion euros ($144.7 billion).

Underwriting Licenses

China National Petroleum Corp., the country's biggest oil producer, sold 20 billion yuan of bonds on Oct. 27, Dec. 11 and March 20 in the nation's biggest corporate offerings. The 2.25 percent the Beijing-based company paid on the March notes, due 2012, is 4.25 percentage points less than the coupon that South Korea-based Hana Bank was charged for similar-maturity government-backed debt in dollars this month.

Credit Suisse in December said China granted it permission to underwrite shares and bonds. The bank's local affiliate, Credit Suisse Founder Securities Ltd., this year helped Shaoxing Water Group Co., Peking University Founder Group Corp. and Lin'an City Urban Construction Development Co. raise a combined 3.1 billion yuan.

Deutsche Bank won approval in January to underwrite bonds through Zhong De Securities, a Beijing-based venture with Shanxi Securities Co. Morgan Stanley has a 34 percent stake in China International Capital Corp., the second-biggest underwriter of non-financial corporate debt last quarter and one of only two brokers permitted to underwrite medium-term note sales.

'Enormous Demand'

"The government is trying to get more capital into state-owned enterprises and companies in China generally," said Chris Keogh, managing director of Gao Hua Securities Co. in Beijing, New York-based Goldman Sachs's partner. "We're seeing enormous demand from companies who want to issue." [Strong demand for yuan-denominated debt (currency is undervalued), combi ned with a large supply from companies who want to issue debt, means that China's corporate bond market will grow fast this year.]

Companies in China, Japan, South Korea and Taiwan face higher refinancing risks than peers in the rest of Asia-Pacific because they're "over-reliant" on bank loans to meet debt obligations, Fitch Ratings said in a March 18 report.

China must open the debt market to foreign investors and loosen capital controls if it wants the yuan to take a bigger role in global finance, said Brad Setser, a former Treasury official and Council on Foreign Relations economist in New York.

"It's hard to have a more global currency if you don't let foreigners own your debt as an asset," Setser said.

Foreign Borrowers

China is increasing the amount of domestic securities overseas funds can buy under the qualified foreign institutional investor program. Standard Chartered Plc, the U.K.'s second- largest bank by market value, said April 7 that its local unit became the first foreign-owned lender to trade Chinese corporate debt after a commercial-paper transaction.

As authorities ease restrictions, foreign companies with operations in China may find the yuan bond market useful for raising cash, Columbia's Wei said. Regulators may begin to allow such international issuers within two or three years [much sooner than that], Keogh of Gao Hua forecasts.

For now, the global credit crisis is hindering banks' ability to garner more market share, said Michael Pettis, a finance professor at Peking University.

"They're dealing with much bigger problems, and a number of them are looking to get out of their Chinese investments," he said. "I don't really see a gold rush going on here yet."

Li Pumin, policy research director of the planning ministry responsible for China's bond sales, declined to comment. Ma Jihua, the National Development and Reform Commission deputy fiscal and financial affairs director governing corporate debt, couldn't be reached for comment.

Wen said last month that China must speed up financial changes to combat the financial crisis. "We can't slow down the process of reforms," the premier told a press conference after the close of the annual parliament session. "Instead, we would rather speed up."

Newsmax reports that dollar soon to soon be irrelevant.

Top Chinese Banker: Dollar Soon Irrelevant
Thursday, April 9, 2009 8:53 AM
By: Dan Weil

Zhu Min, executive vice president of the Bank of China, a government-run commercial bank, says that the Federal Reserve's decision to print billions and billions in new dollars to head off the financial crisis would make the greenback irrelevant to global finance and trade.

That will happen unless [even if] there is another global currency to balance it, he told CNBC.

While the dollar remains a global currency, it can't support the world economy by itself, Zhu says.

"Either we ask the U.S. to take the whole responsibility of the world economy, with the dollar as global legal tender, or else we need something else as an anchor," Zhu says.

He reiterated a call for the use of an International Monetary Fund (IMF) instrument to offset the dollar's influence on international reserves and trade.

Known as special drawing rights (SDR), the practice dates back to the late 1960s, when the IMF used the vehicle to supply reserve assets to expand trade when gold and the dollar were in short supply.

"The IMF's special drawing rights could at least balance the dollar," Zhu says.

Zhu says, however, that the Chinese yuan, known domestically as the renminbi, has a role in global currency matters in the future.

"But we are seeing a new player in the international arena — that's the renminbi. It will take a while before the renminbi will be convertible, but an interesting thing is happening."

The Chinese currency's circulation is growing, he points out. "More and more, it will be used in trade settlements."


My reaction: China's corporate bond market for evidence Premier Wen Jiabao is opening up his currency to the world.

1) Sales of non-financial bonds rose to a record 199 billion yuan ($29.1 billion) this year, making it the third most popular currency for company debt behind the US dollar and euro.

2) Government support for state-controlled banks, the yuan's managed exchange rate, and regulations curtailing foreign buying of local securities have limited past growth in the corporate debt market.

3) China is now carrying out its December promises to open capital markets and ease rules limiting foreign banks' role in bond sales and trading.

4) Record bond issuance and loosened regulations have persuaded at least six overseas investment banks (Goldman Sachs, UBS, etc...) to start underwriting local-currency debt.

5) Securities (corporate bonds and short-term paper) are forecasts to jump about 50 percent to 1 trillion yuan this year.

"It's a hugely liquid market. It will continue to grow."
"The government is trying to get more capital into state-owned enterprises and companies in China generally,"

6) The pace of expansion in Chinese credit markets provides "a striking contrast" to frozen US credit markets.

7) As authorities ease restrictions, Chinse companies may find the yuan bond market useful for raising cash.

8) China is boosting its currency by bolstering the corporate bond market and making it easier to do business in yuan.

"A sizable and vibrant domestic corporate bond market is a precondition" for the yuan to become an international currency



9) China has also set up 650 billion yuan currency swaps to help importers in Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea avoid having to pay dollars for Chinese goods.

10) Wen said last month that China must speed up financial changes to combat the financial crisis.

"We can't slow down the process of reforms. Instead, we would rather speed up."


Conclusion: Buying Chinese corporate debt (from the rig ht companies) could be very profitable. The yuan is horribly undervalued against the dollar, and, if authorities make it possible for foreign individuals to invest in Chinese corporate debt, I would take the opportunity to accumulate some yuan-denominated bonds.

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6 Responses to China Opening Its Capital Markets And Currency To The World

  1. dashxdr says:

    I get enormously nervous when I hear the name "Goldman Sachs" and a number of others (corrupt Wall Street firms) associated with even an endeavor I approve of.

    It's like they'll come up with some way of poisoning the integrity and honesty.

    "Aha! China is strong and the USA is weak. Solution? Make China weak!"

  2. Anonymous says:

    I'm just curious how to reconcile the yuan corporate bond being a good buy and the article "Hyperinflation will begin in China...." here on Marketskeptics.

    Is the hyperinflation no longer set to begin in China?

    Thanks

  3. Bill Jencks says:

    Eric, perhaps you can answer these questions.

    With the Chinese corporate bond market taking off so successfully, what will happen when China starts issuing her own Treasury Bonds as must inevitably happen to open up her Yuan?

    Won't there be a mass exodus from US Treasuries to purchase these cheaper, more robust and better paying bonds?

    And won't the dollar trash rather quickly because of this?

  4. Robert says:

    Bill,

    China is having to give other countries yuan (currency swaps) so that they have yuan to buy chinese goods.

    In order for countries to buy chinese treasury bonds they would need to be earning a surplus of yuan above what they need for chinese imports. In other words china needs to run a trade deficit and greatly ramp up it's imports from the world (so that the world has surplus yuan).

    This may well happen some time down the line.. maybe sooner for oil exporting countries which naturally should have trade surpluses. It is not an immediate concern though. No opec countries have thus far started settling in yuan. If they did start then in the short term OPEC surplus yuan can be lent to other countries by the OPEC countries in order to extract an interest yeild.

  5. Natasa says:

    I agreed with dashxdr.
    Unfortunately.

  6. Bill Jencks says:

    Many thanks for your answer. But it appears, any way you look at it, that the dollar will have a bad time eventually.

    Regarding OPEC, agreed that OPEC will always have a surplus. However this may be further complicated by the introduction of the new gold-backed Khaleeji currency within the region soon(by 2010). So far, it's user base is six ME states - including Saudi Arabia. I wonder if this currency will be the new trade currency for OPEC. A gold backed currency would be far more stable than the volatile USD - which is something that holders of Dollars and US Treasuries have been complaining about for years.

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