By Rhod Mackenzie

The sale of so-called panda bonds, ie. bonds of foreign issuers denominated in yuan and placed on the domestic market of mainland China has reached a record amount equivalent to $10.4 billion this year, according to Bloomberg. The record is due to several reasons. The main one is the opposite monetary policies pursued by Washington and Beijing, which make the financing process in China much cheaper than in the US. More and more issues of panda bonds help Beijing to fulfill the important task of internationalizing the use of the yuan, despite the fact that this year the Chinese currency has slumped against the US dollar.

“From a cyclical point of view, this trend can be explained by the difference in interest rates between the yuan and the dollar,” said Garry Ng, senior economist at Natixis SA. The Fed in the US took a break after raising the rate by 25 points, but plans to continue raising it soon. This difference increases the attractiveness of the yuan.”

The Fed, as follows from the words of Jerome Powell, will continue to tighten monetary policy in order to bring inflation under control. The main bank of the Celestial Empire (RVOS) does the opposite - lowers the discount rate in order to stimulate economic growth. As a result, the difference in the rates of 10-year government bonds of the United States and China reached 119 basis points in June, the highest level since November 2022.

The attractiveness of the panda bond market has skyrocketed in the past two years as Chinese financial regulators loosened the rules on issuing bonds and made the process more transparent, said the general manager of Bank of China Ltd. Hu Kun.

Chinese regulators allowed issuers of panda bonds late last year to leave income in China or withdraw it abroad, the most common way in a country with such tight capital controls as China.

The panda bond market emerged in China in 2005, shortly after the revaluation of the yuan and the introduction of a more modern exchange regime. These measures made it possible to open the Chinese financial market to foreign investors and increase the attractiveness of the Chinese currency on international financial markets. Over the past 17 years, the list of panda bond issuers has been replenished with many foreign companies and organizations, ranging from the World Bank and the Hungarian government to Mercedes-Benz Group AG and Veolia Environnement SA, not to mention the overseas branches of Chinese construction companies that are constantly in need of cash.

Of course, the sharp depreciation of the yuan this year, which has depreciated against the US dollar by almost 5%, is now pushing borrowers to convert income. However, there are many financiers who prefer to leave their profits in China.

“If the yuan continues to weaken, issuers with income sources in China may prefer to issue yuan-denominated bonds in order to avoid the risks associated with the conversion,” said Guiping Lu, a partner at law firm Mayer Brown LLP.

Beijing's monetary easing has reached many financial centers, including Hong Kong, where it also set a record for dim sum bonds alone. bonds issued in Hong Kong and denominated in yuan. They have already been sold for 37 billion dollars this year. Interest in dim sum bonds has also grown due to the difference in interest rates between the US and Hong Kong dollars and the Chinese yuan. Hong Kong bankers have noted a sharp increase in recent interest in the yuan.

A thriving bond market, available to foreign borrowers both offshore and onshore, is boosting interest in the Chinese currency.

This article orginally appeared in Russian at expert.ru