Frankfurt issues first bond backed by Chinese currency
China’s currency was once so immovable nobody saw much sense in owning it. But the more Beijing loosens its grip, the more investors want to get their hands on it. The rags-to riches currency now comes to Frankfurt.
Frankfurt is joining London, Singapore and Hong Kong in the fast-moving market for bonds denominated in the Chinese currency, the renminbi. Germany's KfW development bank announced it was issuing a two-year bond with the volume of 1 billion renminbi at the Frankfurt Stock Exchange.
The development underpins Frankfurt's bid to become a key offshore center for facilitating trade transactions and investments in renminbi. It is also the latest success in Beijing's drive to internationalize its once tightly-controlled currency, which is also called yuan.
Top 10 currencies
China first authorized the sale of bonds denominated in yuan in 2007. They are called “Dim Sum” bonds after the bite-sized delicacies in Chinese cuisine. But they have become a huge boost to the popularity of the currency. The Society for Worldwide Interbank Financial Telecommunication says the renminbi is now among the top ten most-used currencies for global trade payments, overtaking the Swiss Franc to occupy position seven in February.
Goethe monument in Frankfurt
The fate of the Goethe Bond will be closely watched in Frankfurt
Germany signed agreements with Chinese financial authorities in March that permit the sale of Dim Sum bonds at the Frankfurt Stock Exchange. The deal also means Frankfurt will become the first offshore “clearing center” for exchanging euros for renminbi, which are needed for buying Dim Sum bonds.
Investment information company Dealogic reports a sharp increase in the number of Dim Sum bond issuers around the world in the first quarter of this year. There was a record 35 offerings by companies including Caterpillar, BP, and Volkswagen.
No place to go
Bond issuers are increasingly denominating their debt in renminbi for a variety of reasons:
1. there is a large pool of the currency lying around in banks that is all dressed up, but has no place to go. Restrictions remaining on the renminbi still make it difficult to move it around.
2. Also, companies with large businesses in China can use the currency to help fund expansion.
Take automakers selling cars in China; Volkswagen, BMW and Ford all have financing operations lending renminbi to hungry Chinese consumers.
3. KfW is targeting institutional investors.
4. The bank says it is issuing its Dim Sum bond because of growing demand for the currency as a global asset, but also to support Frankfurt's drive to become continental Europe's hub for renminbi transactions.
The Frankfurt-based bank is calling its renminbi-backed bond the "Goethe Bond" in a nod to the city's famous poet.