China is letting a wave of cheap money flow across its borders, turning the country into a rare source of low-cost funding for foreign borrowers. Regulators have approved the proceeds from more than 40% of panda bonds sold so far this year to be taken offshore, the highest share on record, amounting to as much as 130 billion yuan ($19 billion). Panda bonds are yuan-denominated bonds issued in mainland China by overseas borrowers.
The shift echoes Japan decades ago, when rock-bottom yields and a glut of domestic savings sent capital pouring overseas. Subdued inflation and a weak economy have pushed rates lower as borrowing costs rise elsewhere, while Beijing is loosening its grip on cross-border flows to boost the yuan’s global role. China’s 10-year government bond yield stood at 1.68% as of Thursday, compared with 5.23% for US Treasuries and 3.09% for Japanese government bonds.
Foreign issuers raised 115.5 billion yuan through Oct. 8, twice as much as in all of last year, making up 47% of the market. Australia’s Fortescue Ltd. is weighing a 3 billion yuan debut, while Brazilian iron ore giant Vale SA is considering a similar move. UBS Group AG raised 2 billion yuan at just 1.78% in August, the lowest coupon on record for a five-year panda bond from a foreign financial institution.
Demand is growing offshore as well. Sales of dim sum bonds — yuan-denominated debt issued outside mainland China — have surpassed last year’s record, reaching 1 trillion yuan, with non-Chinese issuers’ share rising to 35%. Chinese banks are also extending cheaper yuan credit across borders, competing more aggressively with global lenders.
State-owned financial institutions from Kazakhstan and Uzbekistan are in talks to raise fresh yuan-denominated loans. Regulators announced rules in late 2022 allowing panda bond issuers to convert proceeds into foreign currencies. Part of the motive is Beijing’s effort to internationalize the renminbi.
A deeper yuan financing market gives foreign borrowers another source of funding while encouraging more trade, investment and financing in the Chinese currency, helping reduce China’s reliance on the dollar-based financial system. Another reason is China’s persistent trade surplus, which creates a large pool of domestic savings needing an outlet. Panda bonds allow Chinese investors to lend to foreign companies and governments in yuan, recycling China’s current account surpluses.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing