Renmin-bye: Chinese bonds being sold at record pace

June 3, 2022

2 min read

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What's going on here?

International investors are selling Chinese bonds for the third month in a row, causing concerns to mount over the health of China’s economy.

What does this mean?

Foreign investors have sold a record-breaking $35bn worth of renminbi-denominated bonds since February this year, and $16bn in April alone. Bonds are a type of loan, an I.O.U., in which the lender gets regular interest payments and then the principal (the money originally borrowed) when the bond reaches the end date.

Renminbi-denominated bonds are bonds traded in China’s currency, the renminbi (RMB), also commonly known as the yuan. There are two types of renminbi that can be traded in the Chinese bond markets: onshore renminbi (also referred to as CNY) for transactions in mainland China, and offshore renminbi (referred to as CNH) for transactions outside mainland China. This means China can have two prices for one currency, but the prices are similar most of the time.

What's the big picture effect?

Since the Chinese Government opened its capital markets to the rest of the world, RMB bonds have been very popular with foreign investors. Whilst other developed economies have had suppressed interest rates, RMB bonds have strong credit ratings and have been consistently producing high yields (the income you get from an investment), especially onshore government bonds (CGBs) with an A+ rating. However, investors have now lost confidence and are selling RMB bonds faster than they are buying them.

Back in February, it was speculated that the Central Bank of Russia was behind some of the sales, attempting to raise capital to dilute the impact of US and EU sanctions levelled against Russia in response to its invasion of Ukraine. But after three months of net outflow, the situation appears to be more complex.

Firstly, interest rates have been skyrocketing across the world, which undermines the advantage that RMB bonds used to have and what contributed to their higher yield. The return of Covid lockdowns in places such as Shanghai has also rocked investors’ faith in China’s economic growth, with Goldman Sachs reducing their annual growth forecast for China from 4.5% to 4%. As a result, the value of the renminbi has dropped.

The Chinese Government has dismissed the worries about long-term problems, insisting that the economy is healthy, and the lockdowns will be eased soon, but it doesn’t appear to have convinced many. Long-term investors and speculators like hedge funds are worried that the Government might have to use stimulus tactics, such as lowering interest rates and quantitative easing, which would further reduce the appeal of the Chinese bonds currently residing within their investment portfolios.

Whether this is a temporary bump in the road or part of a more deep-rooted problem remains to be seen, with potentially huge implications for China’s position on the world stage.

Report written by Meghna Dinesh

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