Yuan Lending Surges as Investors Seek Alternatives to Dollar

– von Jiaxing Li

Investors are increasingly opting for yuan loans, and rising yuan lending is poised to surpass chinese banks’ dollar-denominated foreign loans. Attractive pricing is a key factor as Beijing aims to establish the yuan on the global stage.

Chinese banks’ overseas lending has tripled to 2.52 trillion yuan in four years, and sales of onshore and offshore yuan debt have reached or neared record levels for the second consecutive year.

Bankers attribute this boom to cost advantages, as yuan interest rates remain low. However, the market is also gaining its own momentum, generating growing demand for the yuan – a sign that China’s efforts to globalize the currency are gaining traction even without significant progress in capital account liberalization.

“I think this phase is now driven more by a basic interest in renminbi financing,” said Samuel Fischer, head of China Onshore Debt Capital Markets at Deutsche Bank.

“There are more and more international investors who don’t just see this as arbitrage, but who really have a renminbi allocation, and there are some very large anchor orders from outside China,” he said. “The dollar is at a critical point and diversification is really happening.”

China has long sought to promote the yuan as a currency for international trade and financing. Its share of global foreign exchange turnover has steadily increased from low levels, reaching 8.5 percent in April, according to the Bank for International Settlements. The dollar still dominates, accounting for 89 percent of transactions.

This year, non-Chinese issuers raised 169.7 billion yuan ($24.10 billion) in onshore markets through November, while all issuers raised a record 801.9 billion yuan in offshore markets, fueled by strong demand.

While this represents a small fraction of the $9.57 trillion raised globally this year (according to Dealogic, with $4.5 trillion in dollars and $2.2 trillion in euros),the value of onshore and offshore yuan debt issuances by foreign investors has more than doubled over the past three years,data from China’s central bank show.

Central bank data reveals that lending in foreign currencies – primarily dollars – decreased to $375 billion at the end of November from a peak of $587 billion in 2022.Simultaneously, the value of yuan loans reached $357 billion.

PRICE POINT IS VITAL DRIVER

Price is the primary consideration for issuers.

Yuan financing costs have been lower than dollar costs as 2022, as U.S. interest rates rose to combat inflation while Chinese rates fell to avoid deflation.

The yield difference between 10-year Chinese government bonds and U.S. Treasury bonds widened to 160 basis points in November, up from 90 basis points at the start of the year.