- The upcoming Golden Week holiday in China will temporarily suspend trading in mainland China while it continues globally, which might lead to asset value disparities.
- The People’s Bank of China (PBOC) has implemented stricter currency control measures, resulting in declining trading volumes and limiting opportunities for traders.
- Global issuers show increased interest in issuing yuan-denominated bonds, taking advantage of low interest rates.
The Chinese yuan is preparing for the upcoming Golden Week holiday, which will prompt a temporary trading suspension in mainland China. In contrast, trading continues globally, potentially leading to disparities in asset values. Over the eight days, the absence of daily reference rates is anticipated due to the closure of the onshore market.
As the yuan approaches the Golden Week holiday, it faces several challenges. The convergence of the trading halt in mainland China and heightened currency controls enforced by the People’s Bank of China (PBOC) could give rise to substantial fluctuations in the currency’s value and alter trading dynamics.
PBOC’s increasing currency control measures
The People’s Bank of China (PBOC) is introducing additional layers of complexity by implementing stricter currency control measures. These measures have resulted in declining trading volumes and limited opportunities for traders to make directional bets.
For months now, China’s central bank has been setting midpoint guidance that is notably stronger than anticipated. Traders and analysts interpret this as a signal that authorities are becoming increasingly uneasy about the yuan’s depreciation.
The PBOC has consistently set the fix within an extremely narrow range of just 20 pips for seven consecutive days up until Wednesday, marking the lengthiest streak of its kind since 2019. That effectively constrains the yuan’s trading range below 7.32 per dollar, as the currency can only fluctuate within a 2% margin on either side of the fixing.
Currency traders are uncertain about the potential outcomes when the yuan reaches its limit and whether trading will be halted. Historically, the yuan has only come close to this limit, touching the down limit in 2011 when the trading band was narrower at 0.5% and within a single pip of the limit last October. State-owned banks have been actively selling dollars for yuan to stabilize the currency, and this trading activity could also cushion any potential downside.
The heightened currency control measures by the PBOC are part of a broader strategy to maintain stability in China’s financial markets. However, these measures are noticeably affecting trading volumes and limiting opportunities for traders.
Yet, it’s important to note that the central bank’s efforts to manage the yuan through daily fixing are not a permanent solution to alleviate pressure on the currency, especially while the economy remains weak. Morgan Stanley and Citigroup Inc. already forecast that growth will fall below the official target of 5% this year.
The reduction in liquidity hinders speculators from betting against the currency. It makes it more challenging for corporations and investors to hedge against currency risks associated with their exposures in China.
As the Golden Week holiday approaches, traders and investors will closely monitor the yuan’s performance. The combination of the trading halt in mainland China and increased currency controls could lead to unforeseen movements in the currency’s value, presenting both opportunities and risks for global investors.
Yuan appears to be creating an opportunity for global investors
Global issuers are increasingly interested in issuing yuan bonds to capitalize on the low interest rates, positioning the currency as a potential financing tool. Dim sum and panda bonds—yuan-denominated debts sold outside and within China, respectively—are expected to reach new heights in scale as the spread with the US widens.
Liu Lin, Deputy General Manager of Investment Banking at Bank of China Ltd., estimated that offshore yuan note issuance will reach a record 500 billion yuan ($68.4 billion) this year. Additionally, panda bonds are projected to grow by 50% next year, following a similar pace of expansion in 2023.
As the monetary policies of China and other major economies diverge, the cost of yuan bonds continues to decrease. The benchmark 10-year government note yield is at its largest discount compared to a comparable Treasury bond since 2006. This trend has prompted overseas companies to issue 124 billion yuan in bonds in China’s domestic market this year, coming close to the 2016 record.
The sales of offshore yuan bonds have already reached a yearly record of 440 billion yuan. At a time when foreign issuers are still offloading onshore bonds, Liu noted that more foreign issuers may also help attract international investors to the domestic market.
Liu also mentioned that long-time investors in dollar or euro bonds from a specific issuer are likely to invest in bonds denominated in Chinese currency from that same issuer. For instance, Deutsche Bank AG issued 1 billion yuan of three-year bonds for the first time earlier this year, with a coupon of 3.21%. In comparison, the coupon on 550 million euros in bonds issued the same month, which can be redeemed as early as 2028, was 5.375%.
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