China is ready to sell a record amount of yuan-denominated sovereign bonds offshore, according to a Bloomberg report.
China’s Ministry of Finance plans to issue $3.6 billion (26 billion yuan) of offshore debt in Hong Kong this quarter, with the first batch of 16 billion yuan issued on October 25. This addition will bring the year-to-date total to approximately $7.53 billion (55 billion yuan). It marks the highest volume since China started issuing offshore sovereign notes in 2009.
Ramping up this debt issuance will support Beijing’s goal of strengthening the yuan as it trades near a record low. Over the long term, a consistent issuance supply will help establish a pricing benchmark for corporate borrowers.
“Supporting the offshore yuan is probably the top goal of the increased issuance. The amount is tiny relative to fiscal aid,” said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence.
“The offshore government debt pool is still too small, and China will have the incentive to boost it for the long-term purpose of yuan internationalization.”
Yuan declines against dollar
The yuan depreciated against the dollar on Thursday local time, despite state investor Huijin raising stakes in central banks. Some traders anticipate the yuan to receive support through additional Beijing stimulus, which could alleviate economic concerns.
The yuan opened stronger at 7.2957 per dollar but weakened to 7.30 later in the session. Before the market opened, the People’s Bank of China set the midpoint at 7.1776 per dollar, more robust than expected, reflecting authorities’ desire to prop up the currency.
The weakening dollar did not boost the yuan, even though the dollar index fell to two-week lows. Minutes of the Federal Reserve’s September meeting revealed that policymakers were concerned about slowing global growth, labor strikes and tightening financial markets.
Maybank said the recent sharp increase in U.S. Treasury yields and the situation in the Middle East could further increase these risks. Moreover, several Fed officials have shared a cautious policy stance.
China’s economic struggle
China’s economy has faced challenges in recovering momentum after the pandemic, with the anticipated post-lockdown rebound still elusive. Some experts have raised concerns that its property sector may be approaching a Lehman moment.
The Lehman moment, often related to a property crisis, has the potential to trigger a widespread financial collapse and economic downturn. It was named after the Lehman Brothers case on Wall Street, which triggered a widespread financial crisis after it filed for bankruptcy in 2008.
Like the U.S. then and now, real estate accounts for about 20 percent of China’s GDP. A 2020 People’s Bank of China survey found that property accounted for 59 percent of household wealth and 75 percent of household liabilities. This means that consumer confidence is closely tied to the property market.
Most Chinese household debt is also mortgage debt, which has grown rapidly to near U.S. pre-Great Financial Crisis levels in recent years. However, unlike in 2008, Chinese homeowners are paying off their debts. Nevertheless, experts predict China’s real estate problem will unlikely trigger a crisis on the scale of the Great Financial Crisis.
Alfredo Montufar-Helu, the head of the China Center at the Conference Board, said China’s economic model might be outdated.
“China is at a crucial moment where they cannot stop supporting the supply side because economic growth would decelerate, but at the same time, they need reforms on the demand side,” said Montufar-Helu. “Hopefully, the intentions alone can generate more confidence in the market.”