Hungary Issues Sovereign Bonds Denominated In Yuan: Another Nail In US Reserve Currency Status?

Hungary Issues Sovereign Bonds Denominated In Yuan: Another Nail In US Reserve Currency Status?

Tyler Durden’s pictureSubmitted by Tyler Durden on 04/17/2016 10:35 -0400

Submitted by Mike “Mish” Shedlock

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.

Incidentally, Hungary’s announcement follows a comparable announcement by Nigeria which last week become only the second nation after South Korea to sell yuan-denominated debt in China’s domestic market as it seeks to cut borrowing costs while plugging a record record budget deficit, Bloomberg reported.

The dollar-deprived West African nation may shun the Eurobond market, opting instead for renminbi or yen bonds, according to Finance Minister Kemi Adeosun. The government wants to raise as much as $1 billion in international capital markets to finance a deficit that’s forecast to be about 2.2 trillion naira ($11.1 billion) this year, she said April 9.

“We are finding that, indicatively, the renminbi market may be cheaper than the Eurobond market,” Adeosun told reporters in Lagos, the commercial capital. “We are shopping around for the best deals.”

One comment

  • theunhivedmind

    Hats off to the Promethean Viktor Orban as he continues his push against the evils of the European Union Zeusians. Is it any wonder New Venice is constantly attacking Vikor Orban on a daily basis like they are doing to Promethean Vladimir Putin? Viktor is out spoken on all he needs to be and he has helped put a stop to some of the Kalergi Plan madness that has been happening with the refugee crisis. As you can see from this article above he’s also signed into the New Silk Road project and so Hungary has a big bulls-eye target on its back so rest assured trouble will come to that area unless Orban can put in place counter-measures. It’s interesting to see Orban having a connection to Hermet Kohl of Germany. Why? Well Hermet Kohl was on the edge of saving Germany from New Venice but he buckled after serious threats coming out of New Venice (Britain) and its France. It’s time for patriotic Germans to step forth and remove the ball and chain of the Treaty of Versailles. It’s time for Germany to received all the Russian energy Putin wants to provide. It’s time for Germany to come out of the European Union and enter into the BRICS alliance. It’s time for the removal of all US Military bases from Germany and replace them with Russian bases to protect the mainland and the same should happen with Hungary. It’s interesting to see Orban shift towards the Yuan right before the April 19th Shanghai Gold Fix.

    .·´ ¸.·★¨) ¸.·☆¨)
    ★(¸.·´ (¸.*´ ¸.·´
    `·-☆ The Unhived Mind

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