Todays' SCMP has an article claiming that the government has announced that it will make it easier for foreign entities to issue yuan-denominated bonds onshore, use the proceeds to purchase foreign currency, and deploy the money abroad. In the past only the IFC and the Asian Develoment Bank have been permitted to issue yuan bonds, but they were required to invest the proceeds onshore.
But today Deng Xianhong, vice-head of SAFE, told a forum that "We will allow more foreign institutions to issue yuan bonds in China and expand the utilization of the proceeds. We will allow them to use the proceeds to buy foreign exchange and then remit them out of China."
Obviously this makes sense from a monetary policy point of view because anything that causes capital outflows reduces the monetary pressure on the PBoC, but I doubt it will have much impact, at least in the short run. If you borrow yuan -- say at 5% -- and then convert the proceeds into dollars, assuming a 4% annual appreciation of the yuan, you would be essentially borrowing at the USD equivalent of a little over 9%.
Almost any borrower permitted to issue in China can borrow dollars at a much better rate than that. The only real risk here is a further sudden appreciation that could raise the borrowing cost substantially. Perhaps the borrower would be permitted to swap the proceeds into dollars onshore, but in that case the whole benefit of the transction is lost to the PBoC.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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December, 2007
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