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from MacroScope:

China at a crossroads on yuan internationalization project

As China marks the third anniversary of the first ever bond sale by a foreign company denominated in renminbi, questions are rife on what lies next for the offshore yuan market.

Since hamburger chain McDonalds sold $29 million of bonds on a summer evening just over three years ago, China’s yuan internationalization project has notched up impressive milestones.More than 12 percent of China’s trade is now denominated in yuan from less than 1 percent three years ago, Hong Kong – the vanguard of the offshore yuan movement – has more than one trillion yuan of assets in bank deposits and bonds and central banks from Nigeria to Australia have added a slice of yuan to their foreign exchange reserves.

China’s aim to internationalize the yuan has two major objectives: One, to ensure that its companies do not have to shoulder the foreign exchange risk of swapping yuan into dollars in global trade. The second is that as China gradually makes the transition from a current account surplus nation to a deficit country, it would, like the United States, want its debt to be denominated in its own currency.

But after some big early strides, Beijing faces an uphill climb. The yuan has failed to make a meaningful dent in global international trade outside Asia and China’s stock and bond markets remain underdeveloped, slowing the pace of the yuan’s internationalization.

from MacroScope:

Yield is king in China’s ‘dim sum’ offshore yuan bond markets

 

A return to China's offshore yuan bond markets, or "dim sum” as they are colorfully known in Hong Kong, may be sweet for Gemdale, a mainland property developer. But not all fund managers are smiling. The company raised five-year money at 5.63% amounting to 2 billion yuan. Not bad, considering that last July, it raised a lesser sum for a shorter tenor while coughing up nearly double of what it paid this time around. Add the fact that it did so by keeping to the same weak bond covenant and Gemdale seems to have pulled off a stunner.

But Gemdale doesn’t seem to be the only one. In recent days, issuers with weak bond covenants have discovered a ready market for their debt and at much cheaper rates. In theory, bond covenants can be divided into two halves: affirmative and negative ones. The former promises to pay bond holders on time while the latter forbids it from exceeding certain financial ratios such as interest paid/EBITDA, debt to equity, etc. And of course, they are secured by the company's assets or backed by bank guarantees or letters of credit

from MacroScope:

The risk from China’s shadow banks

Many blame America’s shadow banking system, where dangers lurked away from the scrutiny of complacent regulators, for the massive financial crisis of 2008-2009. Richard Fisher, president of the Federal Reserve Bank of Dallas, said in a speech on Thursday that he is now worried about the risks to China from its own version of the shadow banks.

During the recent credit boom fueled by the 4-trillion-yuan fiscal stimulus, off-balance-sheet lending by banks and private loans by nonbanks exploded. This shadow-banking lending activity accounted for an estimated 20 percent of China’s total loans in 2011. With the cooling of the real estate market and with slower economic growth likely in the near term, a large share of these loans could turn bad. And because these loans took place outside the view of regulators, the effect of a sudden disruption in repayment is virtually impossible to predict.

from Chrystia Freeland:

Cooperation among economies is fraying, says IMF head

Though the ongoing crisis in Europe dominated Chrystia's interview with Dominique Strauss-Kahn last Thursday, the IMF head has much to say about the economic outlook for the United States. He believesthe biggest issue facing the U.S. right now is growth -- not deficits -- although he added that America needs a medium-term plan for fiscal consolidation.

Last week's passage of the tax compromise should raise America's growth prospects, but in response to a question about whether the tax cuts on high-earners are stimulative, Strauss -Kahn said, "of course not".

from Financial Regulatory Forum:

COLUMN-China move like history in slow-motion: James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

By Jim Saft

HUNTSVILLE, Ala., June 22 (Reuters) - Asked about 175 years after the fact what he made of the French Revolution, Chinese Premier Zhou Enlai is said to have thought for a moment and concluded: "It is too soon to tell."

Tell a U.S Congressman up for reelection or an unemployed auto parts worker in Ohio the same thing about China's new policy to give the yuan more latitude in how it trades against the dollar and, once you've picked yourself up off the ground, you'll have a different answer.

from Financial Regulatory Forum:

ANALYSIS-China FX move only a minor aid to G20 rebalancing

By Brian Love

PARIS, June 21 (Reuters) - G20 leaders are likely to remain divided over how to balance the global economy at their summit in Canada this weekend, despite China's decision to let its currency trade more freely.

Beijing's abolition of the yuan's 23-month-old peg against the U.S. dollar, announced on Saturday, may partially ease tensions at the meeting by clearing the way for appreciation of the Chinese currency in the long term.

from MacroScope:

Unlocking the Yuan

Reuters's top news and innovation teams have put together a web site on the yuan and the debate over its revaluation. Particularly worth a look after the weekend's statement by China that it would allow more flexibility in its currency exchange. You can access it here, but it looks like this:

Yuan2

from James Pethokoukis:

Stronger Chinese currency is good … and bad

This is from the New York Times is important (as outlined by me):

1) A stronger renminbi could prove a mixed blessing for the United States. If China cuts back sharply on purchases of Treasuries, then the Obama administration could find it harder to finance American budget deficits.

2) But with the Chinese economy booming, a small move in the renminbi may still leave the central bank struggling with trade surpluses and a tide of speculative investment into China. That could force it to continue buying Treasuries with the extra dollars.

from Financial Regulatory Forum:

COLUMN – China’s export dominance must force US rethink: John Kemp

-- John Kemp is a Reuters columnist. The views expressed are his own --

By John Kemp

LONDON, March 23 (Reuters) - Managing the rise of China's vast economy and healing the U.S. trade deficit will require a new willingness and capacity to boost U.S. technology exports at affordable prices. More importantly it requires a new language from policymakers and a new mindset.

In a recent survey of American businesses, the proportion who felt unwelcome operating in China had risen sharply, amid tense stand offs involving Rio Tinto and Google. But with U.S. legislators in full flag-waving cry about China as a currency manipulator, is it really surprising China is looking to become more self-reliant?

from MacroScope:

A grand bargain to solve global imbalances

Michael Pettis, a professor and China expert at the Carnegie Endowment for International Peace, has put together a thorough and informative look at all things U.S.-China trade. It's well worth reading and watching the entire thing, but here's a few highlights that jump out:

* We're likely to see a significant increase in global trade tensions

* China will probably allow the renminbi currency to rise, but not by a lot

* There is a way to resolve those huge global imbalances but it will be painful and the chances of mustering the political will -- in China, the United States and Europe -- look slim.

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