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12 01 2015 | by Victor Xing | Capital Markets

How will yuan’s SDR inclusion affect renminbi debt issuance?

The IMF’s inclusion of yuan into the SDR is a reaffirmation of yuan’s status as a growing international trade settlement currency (rather than the cause).  Higher yuan holding from international trade will serve as a long-term catalyst for higher yuan-denominated debt issuance, assuming the PBOC will adjust monetary policy to keep up international yuan demand.

  1. Yuan’s share as an international payment currency is growing
    yuan share of trade settlement
    Source: SWIFT – renminbi’s share as international payment currency
  2. Using dollar as an example – investors holding dollar (such as PBOC’s dollar reserves from China’s trade surplus) would prefer to use the cash to buy U.S. Treasury securities or U.S. assets.  Even though investors would face higher credit risk by reinvesting in yuan-denominated bonds, such demand would still be significant enough to drive up bond prices and push down bond yields.
  3. Lower bond yields from international demands will give local issuers stronger incentive to borrow.  Lower borrowing cost in the U.S. has contributed to the record corporate debt issuance (please see:
    bloomberg.com

    Bonds for Buybacks Never Bigger in U.S. as $58 Billion Sold), and the same scenario is already happening in China (due to PBOC’s easing measures – please see below).

    Yuan valuation vs. PBOC policy
    PBOC policy affected Yuan valuation

    Rising yuan debt issuance – taking a (brief) pause from currency depreciation.

    Yuan and yuan-based debt demand
    Renminbi valuation vs. RMB denominated debt demand
  4. Following ECB’s large scale asset purchase program (which has pushed front-end sovereign yields to -0.44%), U.S. corporations have shifted debt issuance to Europe to take advantage of lower borrowing costs.  A similar scenario may also develop in the yuan-denominated bond market when borrowing cost decline and if China further liberalizes its financial market.
    yuan and debt demand
    Weaker euro and lower borrowing cost had induced strong euro denominated debt issuance

Next article11 30 2015 | by Victor Xing | Economics

Why is the Consumer Price Index important?