Offshore RMB bonds to expand – Sara Hsu

China´s central government is pushing offshore RMB bonds as a tool to support Chinese firms to go abroad. Financial analyst Sara Hsu looks at the current state of offshore RMB bonds, and expects a massive expansion, she writes in the Diplomat.

Sara Hsu:

The offshore bond market has been highlighted in recent months by the financial troubles of Kaisa Group, a mid-size Chinese property developer that has faced potential default on offshore bond debt due to a graft probe. Kaisa’s woes reflect the troubled financial climate among mainland property developers, some of which are offshore bond issuers. Holders of offshore RMB bonds have demanded higher yields to cover potential risks in the past three months. The market is expected to rebound as the RMB continues to appreciate and the Chinese economy recovers from its downturn.

Despite increased risk in the property market, confidence in the RMB has expanded rapidly in recent years, as RMB clearing hubs have been initiated all over the world. RMB clearing centers have been set up in London, Paris, Sydney, Luxembourg, Doha, Frankfurt, Seoul, Singapore, Taipei, and Hong Kong. The offshore RMB bond market has grown in step; for example, the U.K. Treasury issued 2 billion RMB ($322 million) in sovereign bonds in October 2014, the Bank of China Paris issued the same amount in July 2014, and so on. Some analysts have even gone so far as to predict the RMB will soon become an international reserve currency, the ultimate symbol of currency internationalization. Whether or not this is indeed a reality, there is great enthusiasm for holding RMB and issuing RMB-denominated bonds.

Expanding offshore RMB bond issuance is one aspect of China’s aim to increase the international scope of its corporate sector under the “go out” strategy. This strategy, which has been in place since 1999, is gradually allowing increased financial and real business activity overseas. Offshore RMB bonds allowed foreign investors to obtain a “piece of the action,” in the hopes that China’s economy and currency will continue to advance over time.