Central banks from Thailand to Nigeria plan to start buying yuan as China allows conversion of the currency for investment while slowing global growth spurs the U.S. and Europe to keep interest rates below 2 percent.
Bank of Thailand opened an office in Beijing to assess investments in the nation, Deputy Governor Atchana Waiquamdee said in an interview yesterday in Bangkok. Nigeria will shift 10 percent of its foreign reserves into yuan as soon as possible, on bets the currency will appreciate because of China’s “well managed” economy, central bank Governor Lamido Sanusi said in a Sept. 7 interview in Hong Kong. Philippine Finance Secretary Cesar Purisima said in an interview in Xiamen, south-eastern China, on Sept. 3 that buying yuan may be “prudent.”
Investment has become easier for central banks as issuance of yuan-denominated bonds in Hong Kong more than tripled to 115 billion yuan ($18 billion) this year and institutions were granted quotas to invest onshore. The HSBC Offshore Renminbi Bond Index shows the notes’ average yield reached a record-high 3.22 percent on Aug. 29, three days before the rate on two-year U.S. Treasury notes sank to an all-time low of 0.18 percent. The yuan rose 6.2 percent against the dollar in the past year, outperforming the currencies of Brazil, India and Russia.
“One of the steps to internationalize renminbi is to allow more central banks to hold renminbi as part of their reserves,” Brian Baker, chief executive officer at Pimco Asia Ltd., said in an interview yesterday in Shanghai, referring to the yuan by its Chinese name. The success of this drive depends on “how quickly they develop the financial markets so people have something to invest in,” he said.
China limits the conversion of its currency for investment purposes, increasing the risk of holding yuan securities as assets to tap in an emergency. The 188 billion-yuan dim sum debt market is dwarfed by the $10 trillion in global currency reserves and the $9.5 trillion U.S. Treasury market.
Chinese officials told European Union business executives that the yuan will achieve “full convertibility” by 2015, EU Chamber of Commerce in China President Davide Cucino told reporters on Sept. 7, declining to give details. People’s Bank of China Governor Zhou Xiaochuan said in London yesterday that while there is no timetable for convertibility, the offshore yuan market is “developing faster than what we had imagined.”
The yuan advanced 0.16 percent yesterday in Shanghai, before weakening 0.07 percent to 6.3882 per dollar today, according to China Foreign Exchange Trade System. Baker said that appreciation in the next 12 months may be slower at about 5 percent because of faltering global growth. Pimco Asia is a unit of Newport Beach, California-based Pacific Investment Management Co., which has $1.3 trillion under management.
The yuan’s climb against the dollar in the past year was greater than the 4 percent strengthening in the Brazilian real, the 3.6 percent gain in the Russian ruble and 0.2 percent advance for India’s rupee. The yuan will appreciate 1.4 percent to 6.3 per dollar this year, based on the median estimate of analysts in a Bloomberg survey.
Dim sum bonds handed dollar-based investors a 4.4 percent return this year, according to the HSBC index. Excluding yuan appreciation, the debt earned 0.7 percent while the benchmark Hang Seng Index of shares in the city slumped 14 percent.
Central banks were among buyers when China’s Finance Ministry sold 20 billion yuan of bonds in Hong Kong in August, according to Tee Choon Hong, head of capital markets for northeast Asia at Standard Chartered Plc, the second-biggest underwriter of so-called dim sum bonds this year.
The ministry sold 2016 bonds at 1.4 percent, less than half of the yield on similar-maturity bonds in onshore markets. The yield on Chinese benchmark five-year bonds rose two basis points to 3.943 percent in Shanghai yesterday, according to ChinaBond data.
“We have seen some central banks already go into action by starting the process of taking renminbi as a reserve currency, albeit at an early stage,” Tee said in Hong Kong. “We had quite a big order from one central bank.”
Nigeria plans to start holding the yuan next quarter and prefers it as an investment to gold, said Governor Sanusi. The currency has become “convertible” because of the offshore bond market in Hong Kong and opportunities under discussion to invest in onshore markets and swap currencies with the People’s Bank of China, he said. Nigeria’s $32 billion in reserves are 79 percent dollars with the rest largely held in euros and Swiss francs.
“Confidence in China doesn’t mean lack of confidence in America,” Sanusi said. “Europe and America will continue to be important parts of the world. Having said that, it will be almost living in a dream world to ignore China. It’s the second-largest economy in the world and it’s well managed.”
China’s gross domestic product rose 9.5 percent from a year earlier in the second quarter, while the U.S. recorded a 1.5 percent gain for the period, official figures show. China’s economy will expand 9.6 percent in 2011 and U.S. growth will be 2.5 percent, the International Monetary Fund forecast in June. Standard & Poor’s cut its AAA rating for the U.S. by one level on Aug. 5, while members of the European Union have been unable to agree on the process for bailing out members saddled with debt and slowing growth.
European Central Bank President Jean-Claude Trichet kept the region’s benchmark interest rate at 1.5 percent yesterday, saying the economy faced “particularly high uncertainty and intensified downside risks.” Federal Reserve Chairman Ben Bernanke pledged on Aug. 9 to hold U.S. borrowing costs at the record-low range of zero to 0.25 percent through mid-2013 to bolster growth in the world’s largest economy.
Government debt in China is equivalent to 18 percent of the country’s 2010 gross domestic product, compared with the U.S. debt level at 59 percent of GDP and Germany’s 79 percent, according to data compiled by Bloomberg.
The cost of insuring Chinese government debt against default has jumped 16 basis points in the past month on concern bad loans at banks will rise because of over-investment by local governments.
Five-year credit-default swap contracts were 118 basis points yesterday, according to data provider CMA, which compiles prices quoted by dealers in the privately negotiated market. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
“The yuan is getting more popular for trade settlement but having the currency as central banks’ reserves isn’t that realistic,” said Yim Fung, chief executive officer at Guotai Junan International Holdings Ltd., a unit of China’s second-largest brokerage. “There is a lack of investment channels for banks to choose from.”
The Bank of Thailand was approved by China to invest 7 billion yuan in the onshore interbank bond market and won’t class its investment as part of its reserves because the currency “isn’t fully convertible,” said Atchana. The Hong Kong Monetary Authority also received a quota to invest in stocks and bonds in China, Chief Executive Norman Chan said Jun. 24.
Russia’s central bank will only consider including yuan in its $543 billion reserves stockpile, the world’s third-largest, once the currency becomes fully convertible, First Deputy Chairman Alexei Ulyukayev said in January. The share of global reserves denominated in dollars dropped to 60.7 percent in the first quarter, from as high as 72.7 percent in 2001, International Monetary Fund data show.
China is promoting use of the yuan in global finance and reserve management to ease the impact of any future financial crisis, after a shortage of dollars during the 2007 TO 2009 credit collapse hobbled commerce across the globe. Vice Premier Li Keqiang outlined a range of measures to boost Hong Kong’s status as an offshore yuan center last month, including rules allowing holdings of the currency in the city to be used for foreign direct investment in China. Central bank Governor Zhou said yesterday that he was “very encouraged” that London had expressed interest to help develop yuan offshore business.
Asia plans to promote the use of the yuan in trade to lessen the impact of currency swings that hurt exporters, Indonesia Vice Trade Minister Mahendra Siregar said on Aug. 12. The value of yuan transactions handled by Hong Kong banks, started in 2009, totaled 506 billion yuan last year and reached 800 billion yuan in the first half of this year, according to the city’s monetary authority.
“Central banks are making more enquiries about dim sum bonds,” said Augusto King, co-head of debt capital markets for Asia at Royal Bank of Scotland Group Plc. in Hong Kong. “Central banks are finding ways to diversify their reserves from the dollar and the euro. It’s a natural consequence that they have to re-balance and the yuan is a good choice for them.”