Hungary has become the first Eastern European country to issue a yuan-denominated sovereign bond.
The deal that shows how currying favor with China may be a more important driver for the market than funding.
Reader Steve who sent me the story commented on Hungarian mortgages denominated in Swiss Francs only to see the Franc jump over 20% in value overnight.
“Pretty clever guys!”, said Steve.
Anyone think this is a good idea?
The Wall Street Journal reports Hungary to Issue Dim-Sum Bond as It Seeks to Curry Favor With China.
Hungary priced the three-year bond at a yield of 6.25%, raising 1 billion yuan ($154 million), a small size for a sovereign deal. Bankers not involved in the transaction estimate that if Hungary issued debt in U.S. dollars and swapped the proceeds into yuan, it would have paid almost 1% less in annual interest costs.
The dim-sum market isn’t an appealing market right now. Issuance of offshore yuan bonds has been falling consistently since Beijing’s decision to devalue its currency by 2% in August last year—the prospect of another yuan devaluation has sapped much of the appeal of such bonds for offshore investors.
However, Ivan Chung, an associate managing director at Moody’s Investors Service, said selling yuan-denominated sovereign debt promotes Hungary as a yuan hub, partly by establishing a benchmark off which Hungarian firms can issue their own yuan bonds.
Bank of China opened a yuan clearing center in Budapest last October, according to China’s Xinhua News Agency, in a ceremony involving the Hungarian Prime Minister Viktor Orban and the Bank of China chairman Tian Guoli. In January this year Hungary mandated Bank of China solely for its offshore yuan bond.
This follows a pattern seen in other places. The United Kingdom issued a 3 billion offshore yuan bond in October 2014, four months after China Construction Bank said it would launch yuan clearing in London, setting up that center as a yuan-trading hub.
Sovereign dim-sum issuance also generates goodwill with China, which wants to see more cross-border finance done in yuan. In November 2013, the Canadian province of British Columbia issued a 2.5 billion one-year offshore yuan bond. The small size and short tenor didn’t do much for the province’s finances, but a banker who ran the deal said the offer promoted B.C.’s trade relations with China.
Hungary plausibly had a similar objective with its dim sum. In June 2015, Hungary was the first European country to sign a cooperation agreement for China’s “One Belt, One Road” initiative, launched with $40 billion in funding, to develop trade and transport infrastructure across Asia and beyond. This will likely mean Hungary will get linked to, and therefore benefit from, China’s infrastructure projects, and might even participate in contracts for such works.
“Hungary could use yuan to settle the trade or investment involved, such as payment for China construction firms and equipment, which could help to reduce foreign-exchange risks,” Mr. Chung added.
Valid Hedging Strategy
If corporations seek yuan-denominated bonds to mitigate currency hedging risk, such bonds may make sense.
Hedging is quite the opposite of individuals taking 30-year mortgages in other currencies.
Having a foreign-currency denominated mortgage is a purely speculative play that can (and did) blow sky high.
That said, once these things start, who knows where speculators will take them.
Another Nail in US Reserve Currency Status?
Some may trump this up as another nail in the US dollar coffin. However, in the grand scheme of things, this announcement is essentially meaningless to the US due to its small size.
Besides, having the world’s reserve currency is as much of a curse as it is a blessing.
Mike “Mish” Shedlock
Depends on who you are as to if it is a curse or if it is a blessing.
There is not yet enough trade or reserves in Yuan to make it a threat to the US Dollar as a reserve currency. The Yuan is on a path to become a reserve currency BEHIND the Euro, British Pound, Japanese Yen, and the Swiss Franc.
Hungary is betting on the Yuan dropping in value relative to other currencies. They can Win or they can Lose. Time will tell.
The renminbi (RMB/Yuan) is on a path towards becoming ABSOLUTELY WORTHLESS.
The US dollar is the strongest and most stable currency in the world and is used in more than 83% of all global transactions and accounts for more than 63% of all reserves in the global economy. The US dollar has been SOARING UPWARDS and reached 100 on the DXY last year which was up 24% over the past 2 years and it is now around 94.5 on the DXY.
The remnimbi (RMB/Yuan) is the MOST EGREGIOUSLY OVERPRINTED CURRENCY IN THE WORLD and China has created more than $30 trillion of it over the past 10 years increasing their money supply from less than $3 trillion to now nearly $34 trillion despite the fact that their economy is only about half the size of the US economy of $18 trillion. The US money supply, by stark contrasts, consists of only $3 trillion in M1 with less about only $1.2 trillion in the form of printed currency, and about $13 trillion in M2. The renmimbi (RMB/Yuan) has become a proposterous joke of a currency as China has treated it just like fake monopoly money and that is precisely where its value and utility is headed.
Via ZeroHedge, Kyle Bass is still expecting a massive devaluation in the yuan. Borrowing in yuan at fixed rate might make sense. Bass also has favorable view of gold right now.
http://www.zerohedge.com/news/2016-04-16/kyle-bass-resurgence-gold-and-why-reality-negative-rates-make-no-sense
You nailed it. If you know you will have to repay far less than you borrowed, in real terms at least, you use that currency if you can. I hope China doesn’t implode economically since a billion destitute Chinese, who have never experienced freedom in 5000 years of existence, is not a good thing. I also don’t want to see a Chinese civil war.
A devalued Chinese currency is the normal economic reaction to solving China’s internal economic problems. It would aid their return to being an export oriented economy and fix some internal problems.
Anyone who buys these bonds is an idiot since you prefer a stable medium of exchange and store of value when you invest in something. But, since the hedge fund world if filled more with glitz and salesmanship than common sense, Hungary will sell out and probably sell more soon afterward.
I suppose you would favor dollar-based bonds that will explode as the dollar rises in response to global capital seeking a RELATIVE safe haven.
Has China been using its levered capital to buy assets that will perform in the future and support its long-term growth, or have they been doing what the West has been doing – speculating in financial assets that will go up in smoke?
China is much smarter than you realize, and are on their way to becoming the financial capital of the world in 15 yrs. They understand the conectivity of global capital flows, while US policy makers have little or no practical experience in anything other than how to mask a bribe. While our politicians are debating Transgender use of bathrooms, China is buying up resourses and infrastructure to support their future. Like the defunct British Empire and the empires before, we are too in debt and self-absorbed to do anything about it.
Scot Srodes – China is like giving Boss Hogg several trillion dollars and telling him to be responsible or else it will all be taken away. He then hoards commodities, builds empty malls and empty cities, uses more concrete in a few years as the entire USA in the previous century, and siphons off all the profits into swiss bank accounts and real estate in other countries. Then he confuses all who ask him to explain with econ-o-babble.
Good place to invest your life savings?
China’s holdings of US Treasuries remain BARELY CHANGED right around $1.3 trillion and they do keep buying US Treasuries to replace those that mature all the time in order to keep the total outstanding balalnce right around the same amount which they NEED TO SUPPORT LETTERS OF CREDIT FOR TRADE.
There will be no “gold backing” of the renminbi (RMB/Yuan) and that notion is totally IMPOSSIBLE as the total value of all of the gold ever mined in the world amounting to around 180,000 metric tonnes is less than $7 trillion and about 70% of that is privately owned in JEWELRY widelely dispersed around the world, while the total global GDP is now in excess of $72 trillion and total global assets are approaching $800 billion and the total value of all of the gold in existence is less than 1% of global assets.
The remnimbi (RMB/Yuan) is the MOST EGREGIOUSLY OVERPRINTED CURRENCY IN THE WORLD and China has created more than $30 trillion of it over the past 10 years increasing their money supply from less than $3 trillion to now nearly $34 trillion despite the fact that their economy is only about half the size of the US economy of $18 trillion. The US money supply, by stark contrasts, consists of only $3 trillion in M1 with less about only $1.2 trillion in the form of printed currency, and about $13 trillion in M2. The renmimbi (RMB/Yuan) has become a proposterous joke of a currency as China has treated it just like fake monopoly money and that is precisely where its value and utility is headed.
Reminds me of those crazy days late 80’s and early 90’s when mortgages were based on baskets of 3 to 5 or more foreign currencies. They were sold on the premise that they would be less likely to cause big changes in the overall value of the debt.
The result: Our national currency devalued two times in short time adding about 50% to the debt. Many families suffered, small – otherwise healthy – businesses collapsed and estimated 5000 suicides took place.
I rather prefer to take loan, if absolutely necessary, in the same currency I am earning. That doesn’t say that I have deposits elsewhere as well. Just for the balance.
Orban’s gov’t forced banks (mostly Austrian) to re-write all local mortgages (a substantial majority) issued in Swiss Francs into HUF mortgages at the end of 2014. This was done shortly before Swiss Francs skyrocketed over 20% in value! Turned out to be an extraordinary currency play equal to 2% of Hungarian GDP annually! I believe that this Chinese Yuan short will also be a winner. The cost of holding the short is 4% per year.
If you want to be taken seriously as a world class economic player don’t run private debt up to 300% of GDP at a rate of 60% per year. When your banking system blows up and your currency collapses it’s very bad for your currency’s brand.
Sorry but I’m not impressed with their meetings, emergency or otherwise. The Fed is the definition of regulatory capture. While I want to see higher interest rates so savers can earn money on their life’s work, I expect their meeting was the monetary equivalent of discussing how to best pick one’s nose and pick one’s toes.
Cleveland Federal Stress Index – Check out the chart and check the Federal Reserve’s schedule. The Fed met this week in an emergency meeting with Obama at the White House.
https://www.clevelandfed.org/our-research/indicators-and-data/cleveland-financial-stress-index.aspx
I am by means an economist or a historian in fact an almost total ignoramus might describe my true status in these matters. I would like to add however something of what I have heard to this conversation from Lauren Moret. The Russians and the Chinese are building rail links along the line of the ancient silk road which will reestablish and strengthen the old trade ties between the Orient and Europe. This is further proof of measures taken by the East to counter the desperate move by America and a failing EU to enforce a trading arrangement disadvantageous to all free marketeers. What Hungary has done is surely we all should be doing. American hegonomy is over. The cabal controlling Western economies is finished and yes the end of the American reserve currency status is the final nail in that counntry’s planned collapse by the crooks running the federal reserve.
It is one world now Mish. The reserves currency status enabled America to chest on us all. Larry Robson
Ps to previous post. Wasn’t may 28 set by Putin to establish a gold backed alternative currency? And haven’t Western bankers been having hastily convened meetings recently. And haven’t most of the economic indicators been pointing towards a collapse of some sort. Larry Robson
Putin unlikely to start a gold backed currency
Rumors like that going on for years
If he does, it will not be a gold-backed Ruble – but if he does that, it will be at some astronomical valuation of gold
So if he does, it won’t matter
Mish i never understood it to be the ruble. Renimbi? Or some sino-russian unit? Or the yuan? (http://www.wealthdaily.com/articles/russia-and-china-join-forces-to-kill-the-us-dollar/5093) And may 28th comes from here: http://www.worksmitsu.com/may-28-2016-dollar-collapse-putin.html.
True, having the world’s reserve currency may be a curse in that why bother to run a healthy economy when you can just print money and burn it up. However, if the dollar stops being the reserve currency, it’s not evident that the US will just rebuild a healthy economy. An economy built on the world reserve status, and then the reserve pulled out from under it, well, that spells trouble.
http://www.bloomberg.com/news/articles/2015-01-16/hungary-s-orban-makes-world-s-best-trade-on-swiss-franc-loans
This link explains the brillant move of Orban’s gov’t with mortgages in Hungary. Time will tell if this “short” of the the CNY is a clever play as well.
All things start small. I do agree that no one really wants to be the world’s reserve currency, but the world wants a basket of currencies instead of the US dollar. Our government and Fed policies are devastating emerging markets and they are tired of being screwed.
The world wants neutral systems where one government cannot basically screw them because they do not adhere to their policies. They want a system where one country cannot destroy their economy. This is where more countries are trying to diversify into other currencies.
Politely disagree. People want ‘one currency’ providing it is a stable medium of exchange and store of value. The Eurozone will never have this because of the fact many distinct countries who use the Euro see the Euro as a means to free ride and stick their bills with someone else. It’s a ‘screw your buddy’ paradise. Unlimited ECB money printing using comical pretexts are the only logical outcome, at least until the whole thing collapses in the not too distant future (a few years, not a few months).
China is large and wealthy, but managed by people with the economic know how of suddenly rich people from Hooterville who have been seduced by corrupt bankers who now run the place. I don’t want to use their cash for my savings account.
How ’bout those Japanese with their BOJ antics. You want yen? Just ask. They’ll print some just for you.
This leaves the USA and the greenback.
Pick your poison.
You ignore China’s economic savvy at your own risk. Their economic advisors have worked in trading houses around the world and understand the cycles that move capital. What do our policy makers know? At best they contemplate theoretically-flawed models from their Ivory Towers, and rely on taxpayers and bombs to cover up their consistent mistakes.
Blacklisted – Economics is simple. Trying to make it a science with mathematics makes it flawed and useful as a tool for various kinds of fraud.
You are right about Chinese Ivory Towers. Tell me, how does that differ from the Hooterville approach to sudden wealth? The corrupt bankers who help don’t care about Chinese well being. They see China as a tool for self enrichment. The Ivory Tower people see it as a tool for political power and wealth. Economic theory is the means for both to convince the gullible they are smart and have a plan. It’s the language of sales fraud. Nobody in China has a clear vision on how to spend trillions of yuan for the good of the nation. Many many Chinese have a good idea on how to get some for themselves.
Not my idea for a reserve currency.
In a vacuum, this would be meaningless … and so would the Brexit vote and the coming elections in the US, France, and Germany. Of course, capital does not live in a vacuum, and when it sees the positive results of citizens moving away from centrally-planned establishments, it will adjust accordingly.
To understand the speed of the transition to a new world reserve currency (likely a SDR-like basket), think about a room full of mousetraps loaded with ping pong balls. Whether Hungary is the first ball to be tossed into the room, or its Brexit, major elections, Greek defaults, shale/oil project defaults, or US-assisted Syrian rebels shooting down a Russian jet; the house of cards will be exposed in the next 2 yrs, and the popping of mousetraps with balls flying through the air will become a blir, resulting in another Bretton Woods.
In the meantime, events will unassuming move forward that drives up the value of the dollar until it results in a default ball being tossed into the room of mousetraps.
“Some may trump this up as another nail in the US dollar coffin. However, in the grand scheme of things, this announcement is essentially meaningless to the US due to its small size.”
Any one nail is essentially meaningless. A cycle is a process, not an event. Rome was not built in a day, as the saying goes. The building of the next Chinese empire is not going to happen in a day. The decline of the American empire will also be a process. That process leads to events, such as the waterfall collapse of the Roman empire or the Soviet empire.
As Martin Armstrong projects, the financial center of the world will move from the west to the east by 2032. That is still over a decade away. A lot happens in a decade and no two decades are the same.
This is complete idiocy. The Hungarian government doesn’t collect taxes that back its bonds in yuan. The reason they are doing it is to sell to Chinese investors.