(Bloomberg) — China has surged ahead of the U.S. for corporate bond deals in its yuan credit market in recent months, a rare shift that underscores the deeper impact of the two countries’ divergent monetary policies.
Yuan bond issuance by non-financial companies surpassed that of the dollar in both July and August for the first time in two consecutive months, according to data compiled by Bloomberg. Momentum has been picking up since the Federal Reserve began its tightening cycle in March: Sales of yuan notes, almost entirely by Chinese firms, totaled 2.04 trillion yuan ($306 billion at exchange rates in time of agreements) between April and August. against $283 billion in debt worldwide.
The changing credit market landscape is largely the result of a plunge in dollar-denominated debt sales after the U.S. central bank began a relentless campaign to fight inflation while Beijing did the opposite to keep funding costs low for a troubled economy. A weaker yuan also bodes well for the trend, even as it reduces the dollar value of local bonds.
But given the minimal overseas exposure to corporate yuan notes, the latest development remains a reminder of the sheer size and weight of China’s economy, despite its currency’s international popularity, at least for now.
“The rise in yuan-denominated corporate debt reflects the divergence of 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 far from challenging the supremacy of the dollar, as most of the yuan bonds are still issued by Chinese companies.”
As the Fed continued to raise interest rates, sales of dollar-denominated corporate bonds have fallen about 40 percent to an 11-year low of $592 billion this year as of Sept. 6, with U.S. companies accounting for 76 percent of them. In contrast, the issuance of yuan notes has fallen by about 6%.
Until this year, it was rare for yuan corporate bond issuance to exceed that of the dollar for an entire month, and the few cases that occurred mostly occurred in December due to the Christmas-induced lull.
The absorption of China’s local credit market was Beijing’s efforts to rescue an economy hit by a strict Covid Zero policy and an unprecedented property crisis. Authorities cut key interest rates and kept the financial system flush 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 incentive to return home for financing.
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 maintain the pace in the coming months. Signs are also beginning to emerge that the increased clarity of the Fed’s policy trajectory has persuaded more borrowers to accept the new reality of higher dollar rates.
The opening of its massive domestic bond market has been one of Beijing’s most tangible and successful liberalization efforts in recent years, with Chinese debt included in major global indices bringing hundreds of billions of dollars from foreign central banks to university endowments.
That said, global investors have mostly parked their cash in Chinese government bonds or bank bonds, showing continued reluctance to hold local corporate debt amid concerns about an opaque legal system and less reliable credit ratings onshore.
And despite government efforts to promote the yuan-denominated panda bond market, it is still dominated by offshore entities of Chinese companies, with genuine foreign issuers such as the Asian Development Bank and the Polish government in a small 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 post-bankruptcy debt restructuring process is not transparent enough.”
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