Bonds denominated in dollars that were issued in China are known as Chinese USD bonds. These bonds were issued by Chinese corporations and financial institutions. As a result of Chinese companies looking to raise capital in other countries, this segment of the bond market more than doubled in size in 2017, reaching $214 billion.
As a result of discussions with more than 400 market participants located across Asia, the term 'Kungfu bonds' has found its way into common usage in China. The name 'kungfu bond' has been given by the financial institutions of China to refer to dollar-denominated bonds issued by Chinese institutions. These bonds have been denominated in US dollars.
Kungfu bonds are a type of Chinese issued dollar-denominated bond. They are also known as Chinese USD bonds. This segment of the bond market saw a growth of more than 100% in 2017, reaching a total of $214 billion. This outpaced all of the other major foreign currency bonds that were issued in Asia by a significant margin. In 2017, the total amount of Chinese dollar bonds issued increased more than twofold to $214 billion. The term 'Kungfu bonds,' which refers to Chinese bonds denominated in US dollars and issued outside of China, is gaining popularity. Kungfu bonds are an attractive option for global investors who are interested in increasing their yields.
Since 1985, China has consistently maintained a sizable trade surplus with the United States. However, in order to pay their employees and keep their money safe, exporters require yuan even though they are paid in US dollars. The People's Bank of China routinely steps in to correct market conditions in order to maintain a stable exchange rate between the yuan and the dollar.
China's holdings of U.S. Treasury securities amount to approximately $971.8 billion and 13% of the U.S. national debt. Analysts and investors are concerned that China may sell these U.S. Treasuries as a form of retaliation. This would cause interest rates to rise, which would be detrimental to the expansion of the economy.
Maintaining growth that is led by exports is China's strategy, as this helps to generate new job opportunities. As a result of the fact that this tactic is dependent on exports, China needs RMB in order to maintain its current currency exchange rate. The value of the RMB would self-correct and go up if the PBOC stopped intervening in the currency market.
At the end of the year 2021, the total foreign exchange reserves held by the People's Bank of China amounted to approximately $3.3 trillion. The Chinese government holds a significant amount of its foreign exchange reserves in the form of the euro. In order for China to earn even the risk-free rate, it must make investments in such massive stockpiles.
The safest haven for China's foreign exchange reserves is found in the debt of the United States. China will continue to amass large amounts of U.S. currency so long as its economy remains primarily focused on exports and it maintains a significant trade surplus with the United States. Both countries stand to gain from this situation, making it a win-win scenario for both of them.
Gold was the universally accepted form of reserve currency up until the 19th century. The United States Treasury is widely regarded as one of the safest investment options available today. In the years immediately following World War II, a great number of nations accumulated enormous reserves of pounds sterling. The United Kingdom's economy suffered significantly as a direct result of the selling off of those reserves.
When China lends money to a country that also possesses the unrestricted authority to print that money in any quantity, China needs to exercise extreme caution. A high rate of inflation in the United States would have a negative impact on China due to the fact that the real value of the United States' repayments to China would decrease in the event of high inflation.
The Macau government gave its blessing to the launch of the financial trading platform known as MOX on December 12th, 2018, the day it was established. Since the inception of MOX and continuing through the end of the year 2020, the exchange will have listed 39 outstanding bonds with a combined face value of 115.7 billion MOP. The issuance of offshore Chinese bonds denominated in US dollars now has access to a new source of financing thanks to the MOX bond market. MOX is not required to conduct a comprehensive review of the information contained within the bond listing application documents.
The listing application documents required by MOX are much less complicated than those required in Hong Kong. The Hong Kong Stock Exchange's review of the bond listing applications typically takes about a week to complete from start to finish. The application fee for listing a bond on the MOX exchange is lower, and there is a greater emphasis placed on the disclosure of information regarding the bond. The MOX bond listing application fee is MOP39,000, but this fee doesn't have to be paid until after the issuance of the bonds has been fully completed. In the event that the bond listing is not successful, the only fee that must be paid is a MOP2,000 administrative fee. The fees are more malleable and have the potential to lower the issuer's total cost of bond issuance.
The process of developing MOX's bond listing system is still ongoing at this time. The vast majority of bond issuers decide to simultaneously list their securities on the Hong Kong Stock Exchange and the MOX. Bonds that are simultaneously listed in Hong Kong and Macau will be beneficial to the long-term growth of the offshore Chinese market for US dollars in bonds.
Ashly Chole - Senior Finance & Technology Editor