Chinese issuers are returning to the euro bond market after a long absence. State-owned oil refiner Sinopec and oil producer CNOOC recently raised about half a billion euros each in the first Chinese euro offerings in nearly a decade. It makes financial sense: interest rates currently reflect the diverging monetary policy of the Federal Reserve and the European Central Bank. It also furthers Beijing's long-term plan to become less dollar-centric. With the two goals aligned, such issuances could become a little more common.
Market conditions are ripe for more borrowing in euros. Yields on US Treasuries, the benchmark for dollar-denominated bonds, have risen since May because the Federal Reserve is expected to scale back its quantitative easing programme. But those on German government bonds, the touchstone for euro issuance, are being contained by the European Central Bank's plan to keep policy accommodative for an extended period. The yield premium which 10-year Treasuries offer over Bunds has doubled so far this year. Spreads have also widened at other maturities.
Chinese firms will, of course, continue to tap the liquid dollar bond market. However, they may want to take advantage of more attractive euro funding conditions to diversify their funding and investor base. That sits well with China's intention to reduce a reliance on the dollar that leaves its economy too dependent on the vagaries of US monetary and fiscal policy. While the shift can't and won't happen overnight, Beijing has slowly been preparing the ground in recent years.
China has gradually diversified its foreign exchange reserves, though the lion's share is still held in dollars. It has also promoted the international use of its currency, notably by establishing a series of bilateral currency swaps with other central banks. The latest, concluded last week - and the second largest to date - is with the European Central Bank.
The budget showdown in Washington, and the threat of a US debt default, were a reminder of why Beijing wants its economy freer from the dollar's vagaries. Chinese firms' bond issues can only help. By a happy coincidence, they also present an attractive proposition.
