Yuan Backed Bonds Seeing Huge Demand from International Groups

International corporations are flocking to China's bond markets, issuing unprecedented levels of yuan-denominated bonds and taking on significant loans from mainland banks. They are taking advantage of the extremely low-interest rates on the yuan while funding costs in other countries are on the rise. Corporations and financial institutions are raising unprecedented funds by issuing yuan-denominated bonds in mainland China and in Hong Kong, referred to as panda and dim sum bonds, respectively.

The increase in their borrowing from Chinese banks has propelled the yuan ahead of the euro to become the second most widely used currency in global trade finance, boosting Beijing's efforts to expand the international use of the yuan.

Fiona Lim, a senior FX strategist at Maybank, says that the global trend of borrowing from China is surprising, given that international investors are currently avoiding the world's second-biggest economy due to geopolitical tensions and slow growth.

"While the fundamental story is not compelling for Chinese investors looking for growth, the depreciation of the yuan as well as the rate cuts result in a much cheaper cost of borrowing," Lim said.

During the months of January to October, foreign companies like the German carmaker BMW and Crédit Agricole S.A, along with international branches of Chinese firms, collectively raised a historic 125.5 billion yuan ($17.33 billion) through the sale of panda bonds. This figure represents a 61 percent increase compared to the same period in the previous year. Last month, the National Bank of Canada successfully raised 1 billion yuan through the sale of a three-year panda bond with a 3.2% coupon rate, significantly lower than the 4.5% rates domestically.