China to Issue $2 Billion in Dollar-Denominated DebtPaul-Martin Foss
The Chinese government just recently announced plans to issue $2 billion in dollar-denominated debt, its first dollar-denominated debt issuance since 2004. With countries such as Iran, Russia, and Venezuela turning to the yuan both for political reasons as well as for oil sales, and with the yuan’s recent inclusion in the IMF’s basket of currencies that make up Special Drawing Rights (SDRs), China’s sudden decision to issue dollar-denominated debt is puzzling. But delving a little deeper show that, paradoxically, that debt issuance will actually help China internationalize its financial system and take on the dollar as a competitor for world reserve currency status.
China’s domestic debt market is over $9 trillion, the second-largest in the world behind the United States. But because Chinese debt markets have been slow to open up to foreigners, the lack of knowledge of the Chinese market and the opacity of pricing have been barriers to foreign investment. Issuing dollar-denominated debt is a way for the Chinese government to begin to expose foreign investors to Chinese debt markets. That will help establish a dollar yield curve that will enable foreign investors to evaluate China’s internal debt markets, where credit ratings tend to be a little more optimistic than in the West.
While the Chinese government has been historically reluctant to allow foreign investment, fearing flows of “hot money” that can move in and out of the country quickly and have affected other Asian countries in dramatic fashion, the yuan’s future status as a world reserve currency will require a greater openness to foreign investment. It’s no secret that China wants the yuan’s international status to grow, as it hopes eventually to dethrone the dollar as the world’s primary reserve currency. That won’t be an overnight process, but the steps to get there are already underway.
If the yuan overtakes the dollar as the world’s reserve currency, it could have dire consequences for investors who have grown up knowing only the dollar as the world’s dominant currency. Interest rates in the United States would spike and financial markets would be upended. Those with investments in gold and silver, however, would be well-protected for a number of reasons.
Precious metals would serve as a safe haven for investors looking to divest themselves of dollar-denominated assets, leading to increased demand and therefore an increase in price. And because the yuan may very well end up being backed up by gold, that would be an even further boost to gold investors. Again, these changes won’t happen overnight, but the long-term outlook favors gold investments over dollar-denominated paper assets.