Diary of a Financier

To Buy CNY Bonds

In Capital Markets, Economics on Fri 27 May 2011 at 16:23
  • Part of the weak USD policy has aimed to shake CNY loose of its parasidic peg.
  • This creates an inflation call option of sorts, because we know the US wants to pursue a weak USDCNY for trade purposes, but China cannot withstand the inflation & will have to appreciate CNY even more.
  • To take advantage, I’m looking for CNY denominated bonds from US issuers.

Back in March, I evaluated a thesis about a weak dollar policy as (more than anything else) a means for the US to shake the Chinese Yuan (CNY) parasite:

The aim of the latest government stimuli could have been to inflate away our federal debt, help mortgagees, mend banks, stimulate domestic borrowing, and/or shake China off its US Dollar peg. Yet, if ever interrogated for the waste they lay upon the globe, Tim Geithner & Ben Bernanke will always cite their favorite parlay: China [and other emerging markets] had the autonomy to fight inflation by breaking its USD peg.

Look at the USDCNY chart for the empirical evidence:

USDCNY daily

China’s already feeling the domestic inflation. SocGen posted a piece this morning, which argued that China will turn to exporting that inflation via energy, metals & commodity price increases (which we all know has started, but SocGen says it will get worse by 2012).

Considered in isolation, that would be bad for the US, because American assets (equities) probably cannot withstand a snapback rally in the US Dollar if the Treasury were forced to stem-off rapid inflation. Yet, evaluating the macro perspective, I don’t think the Treasury will counteract such inflation. When you consider American policymakers’ thought process, the whole design is to force the Chinese to appreciate their Renminbi because it’s sucked the blood of American consumers (and the trade deficit) for so long. The Chinese have struggled with inflation for over a year now. They’re deep into the inflation battle, and they’re more threatened by a continued rise in prices:

China CPI

The US has had its bout with headline inflation, but we’re still dealing with a more threatening deflationary undertow. Therefore, a marginal increase in inflation exacerbates the Chinese situation a lot more than the US, so it’s like an inflation call option: you know that if inflation runs high enough, China has to let the Yuan appreciate in response. The US can keep pursing a weak dollar against the Renminbi, but China can’t withstand strong inflation much longer. Do not confuse this with a broadly plummeting US Dollar Index (DXY), because CNY is not an input, and my bullish USD call is still en force. (See DXY components here.)

Should we buy CNY bonds to take advantage? I’m just worried about the credit risk… so I’m searching for some American companies’ CNY denominated issues.

–Romeo

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  1. I think you called it pretty good here. I have been looking into some for myself. HSBC HK offers CNY bonds. First you have to have an HSBC account and transfer your monopoly money (U.S. Dollar) into HKD first. For what I have seen they are only getting a coupon of 1.5 however just holding CNY is what’s important. Something tells me you aren’t going to find any U.S. companies with CNY. OR ones that will be guaranteed or insured.

    • As I recall from last year, a lot of the financials issued CNY denominated debt: MS, HSBC, BCS. I found some MCD & CAT issues just based upon my memory of the underwriting. I’d prefer a non-financial, I’m still looking, but at the same time I’m evaluating some of these:
      1. MS 2014s 1.625 cpn (CNY)
      2. MS 2016s 0.5 cpn floating
      3. HSBC 2015s 0.75 cpn & 0.5 cpn
      4. HSBCs 2020s 0.5 cpn & 2.10 cpn
      5. CAT 2012s 2.00 cpn
      6. MCD 2013s 3.00 cpn

      • Hello,
        did you manage to find some CNY denominated bonds (US or European companies, not financials)? I’m currently also looking for such bonds.

      • Just to be clear, make sure to check my disclaimer and all. I’m not recommending the purchase of anything, but I did want to purchase these bonds myself. Yada, yada…

        I did find some short paper in a few names like MCD and CAT. A few problems, though: at that time, no offers on the secondary mkt, and no new issues. I saw some MCD bonds offered in late June, but:
        1. the size (and the issues in general) was not big enough for me.
        2. that MCD paper was short (2013s) if I remember right.
        3. USDCNY had already moved 6%.

        The thesis may still hold, but obviously it’s not a grand an opportunity as it was 2-1/2 months ago.

  2. In case you really go on and put this trade down I would consider buying long term OTMF USDCNY calls.
    More on the technicals behind it on my blog or we could chat over GTalk or email.

    Basically I believe this is an extraordinarily crowded trade (just from inverted FX forward curve and general market chatter) and cheap hedging makes sense.

    What are the yields on these bonds?

  3. […] Yuan (CNY) is currently undergoing its own correction after years of manipulation. I recently argued that China will be forced to appreciate CNY further. China will shift gears and build its future […]

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