Chinese yuan slowly but surely cutting into US dollar dominance

Meanwhile, in a first for a euro-zone country, Portugal sold 1.99 billion yuan of eight-year debt in the offshore yuan bond market. The country’s debt agency said the securities, nicknamed dim sum bonds, aim to diversify its funding sources and lower interest-rate costs. Portugal’s effort to tap the offshore yuan bond market followed its 2019 issuance of onshore yuan bonds, also known as panda bonds.

Since the last euro-zone debt crisis, economic ties between China and Portugal have deepened. More European countries are considering closer economic ties with China in the face of Washington’s increasingly erratic and aggressive trade and foreign policies. Portugal’s dim sum bonds may be a sign of more to follow.

As for Central Asia, China has been making inroads into the region, especially through its Belt and Road Initiative. The three-year panda bond from Samruk-Kazyna – the fund has an estimated US$88 billion in assets – is priced at a “record-low” annual yield of 2.18 per cent. The bond arrangement shows support and confidence among Chinese institutional investors for the resource-rich country whose economy is the largest in the region.

It is an example of how developing countries can use China’s debt market as a stepping stone into the global capital markets. Banks in Hong Kong have recently doubled their access to onshore renminbi liquidity amid strong client demand.

China makes no secret of wanting to attract global capital and internationalise the yuan. Roughly 78 billion yuan in panda bonds have been issued this year, an 88 per cent year-on-year increase. The interest-rate gap with the US dollar is making yuan financing attractive internationally. And China’s ongoing financial liberalisation and streamlining of cross-border yuan usage increase appeal to foreign investors. Slowly but surely, the yuan is giving King Dollar a run for its money.