The Greenback is Getting Some Chinese Competition
Posted by Larry Doyle on September 8, 2009 12:57 PM |
The BRIC nations (Brazil, Russia, India, China) have certainly not been bashful in promoting the need for some competition in the greenback as the international reserve currency. Is that competition going to escalate as China issues yuan-denominated bonds for the first time? Major high five to MC of Investor Rebellion for bringing this developing story to my attention.
The Business Insider writes, Dollar Threat: China Selling Yuan Bonds for the First Time:
In yet another step to internationalize the yuan as a global currency, China will be selling yuan-denominated bonds on the international market for the first time.
This could be a new option for fixed-income investors, including central banks, who want to diversify away from the dollar.
AP: The 6 billion yuan ($876 million) bond sale is slated for Sept. 28, the ministry said. Hong Kong is Chinese territory but has its own currency and regulatory system and often is used by Chinese companies to deal with foreign investors.
The yuan, also known as the renminbi, or people’s money, does not trade on global markets despite China’s huge foreign trade, but Beijing is gradually expanding its use abroad.
It will be interesting to see what yield these bonds end up offering, and if central banks bite.
Given the consensus view that the yuan is artificially undervalued versus the dollar, longer-term Chinese bonds are likely to be appealing for their currency appreciation potential, in addition to their interest income. We expect a strong a response.
This development is very meaningful and bears watching. Questions and concerns I would have for investors include:
1. Will the Chinese indicate the expected size of issuance? This question will help frame the potential concern of liquidity.
2. There has always been concern around the lack of transparency in regard to the People’s Republic of China’s finances. Truth be told, there is increasing concern about the lack of transparency with our Federal Reserve and U.S Treasury as well.
3. What will be the relative pricing in order to assess the value of these bonds?
4. Who will underwrite these securities?
5. Will these securities be purchased strictly by foreign central banks and consequently not trade in the secondary market?
While all these questions are important in the process of assessing the long term viability of these bonds, the fact is Uncle Sam’s largest creditor, that being China, is beginning to issue debt. That simple fact is not beneficial for our funding needs and the longer term financing of our massive deficit.
MC, thank you again for pointing out this story on our economic horizon and global financial landscape.