China's Euro-Denominated Bond Issue Meets High
Demand
A 10-year one billion euro bond issued by the Chinese
government met with high demand from European pension
funds and asset managers. Europeans offered nearly 4 billion
euros to get in on the bond issue. Its success means that
China will be less reliant on the dollar for foreign bond
issues, and may seek to diversify its overseas investments.
The US dollar-tranche of the bond was limited to $500m
of five-year notes, compared with previous fund raisings
of up to $1bn.
On the European side, this means that European buyers
see the newer debt in China as being comparatively safe,
compared to the bad loans from the formerly state-owned
banks which have not yet been disposed of.
The success of the issue means that the Asian countries
will most likely issue more euro-denominated debt, as
faith in the new currency grows. For the US government,
it will mean that it will most likely have to raise US
interest rates to attract buyers of US debt instruments.
The Chinese and Japanese central banks have been the
largest buyers of treasury bonds at the US treasury bond
auctions. As US government debt has grown, the US budget
will depend on steady purchases to service its high level
of government debt.
The Chinese yuan is pegged to the US dollar at a fixed
rate of 8.28 to one US dollar. Increased acceptance of
the euro in China, and of Chinese debt instruments in
Europe make it more likely that the yuan will be able
to switch over to a basket of currencies in the future.
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