China shifts from greenback detractor to record seller of US dollar bonds

Beijing

CHINA used to rail against the outsize role of the US dollar. But in a major turnaround, the world's second-biggest economy has started embracing the currency of its larger rival.

Chinese companies and banks - and even the government - sold bonds denominated in dollars at a record pace last year, and underwriters expect that growth to continue for years. The roughly half-trillion-dollar market has two key attractions for China's borrowers. For some, it's an easier place to raise cash than at home - where regulators are cracking down on leverage. For others, dollars are simply easier to use to fund acquisitions and investments abroad.

The upshot: There's a large and growing supply of dollar securities that offer exposure to Chinese companies for investors wary of diving into the country's increasingly accessible yuan-denominated domestic debt. The offshore bond market is also set to provide a stake in President Xi Jinping's "Belt and Road" initiative (BRI) - a grand plan that envisions deepening trade and investment ties with countries across the Eurasian landmass and beyond. Bankers see the BRI as a key source of growth in Chinese dollar bonds.

"To hedge the escalating trade tensions with the US, China will become even more committed to the BRI, which is China's form of globalisation," says Ken Hu, chief investment officer for Asia-Pacific fixed income at Invesco Hong Kong Ltd, which has introduced a fund to invest in what's also known as the Silk Road project. "We expect increasing new Chinese dollar-bond issuance to relate to the BRI." The irony of using dollars to fund a globalisation project that helps counter President Trump's "America First" doctrine is all the richer coming nine years after China blasted the global financial system's overreliance on the greenback.

In the depths of the global financial crisis, then-People's Bank of China Governor Zhou Xiaochuan called for the creation of a new unit of exchange "disconnected from individual nations" and designed according to rules.

The heads of the US Department of the Treasury and Federal Reserve swiftly rejected the March 2009 call, assuring a dead end for the proposal at the one institution capable of overseeing a global currency: the International Monetary Fund. (As the IMF's largest contributor, the US essentially holds veto power over major decisions.) Undeterred, China's official Xinhua News Agency in 2013 repeated the call for a global currency.

It would be a step towards a "de-Americanised world" insulated from the woes of a country that was then embroiled in one of its periodic political battles over its debt limit. In the meantime, Chinese reformers saw a golden opportunity to elevate their own currency and pressed for allowing the yuan to be used more freely abroad so it could "overtake" rivals, in the words of one official in 2009.

China needs to act "cautiously" on yuan internationalisation, says Hu Xingdou, an economist who serves as executive chairman of the Belt and Road Foundation. Not only does the managed exchange-rate regime help reduce the risk of capital outflows, but it also makes it tough for speculative money to surge into China. The flip side is that Chinese companies need dollar-bond sales to better tap international capital. "After all, offshore investors prefer dollar bonds" to those priced in yuan, Mr Hu says. BLOOMBERG