Yuan Takes the Global Stage: China’s Cheap Money Attracts Foreign Borrowers

“Dim sum” bonds are placed outside mainland China, primarily in Hong Kong, while “panda” bonds are issued on the domestic Chinese market by foreign issuers. Interest in them is driven primarily by the low cost of yuan financing. The yield on China’s 10-year government bonds is around 1.68%, whereas comparable U.S. Treasury securities yield about 4.78%. For companies, banks, and governments, this means an opportunity to borrow funds noticeably cheaper than in dollars.

Market growth is supported by the Chinese authorities, who seek to expand the yuan’s international use and strengthen the country’s position in the global financial system. An additional stimulus was the increase in quotas for Chinese investors channeling capital into Hong Kong through the Bond Connect mechanism. This contributed to rising demand, especially for long-term bonds.

A key source of demand remains China’s domestic savings. With low government bond yields, limited investment opportunities, and weak lending, banks and insurance companies are looking for instruments that can provide additional income. “Panda” bonds offer such an opportunity, although their average yield only slightly exceeds that of government securities.

For now, the main driver of the market is banks—both Chinese and foreign. Foreign financial institutions often convert yuan funds raised into other currencies and use them for global operations. Governments are also turning to yuan bond issuance, including Kazakhstan, Indonesia, Slovenia, and Pakistan.

Large international corporations are still taking a wait-and-see approach. One obstacle is the relatively small size of issues: potential borrowers need the ability to raise at least $1 billion. In addition, foreign issuers have to spend significant time getting acquainted with Chinese institutional investors and building trust.

Thus, the yuan is taking a noticeable step toward becoming an international funding currency. Low interest rates increase its attractiveness for borrowers, but it has not yet become a full-fledged alternative to the dollar. Limited use of the yuan as a reserve asset and the low yields of Chinese bonds continue to restrain its global spread.

Author: Doctor of Economics, Professor of the Department of World Economy and World Finance, Faculty of International Economic Relations, Financial University under the Government of the Russian Federation Igor Borisovich Turuev.