Yang Junhao, CFA, FRM, is currently the CEO of CCX Green Finance International and the Vice President of CCX Asia Pacific. Previously, he was a senior investment banker with more than ten years of experience in the financial industry, and worked at Guotai Junan Securities and China Merchants Securities. Dr. Yang holds a Master of Finance from the University of Sydney, a PhD in Finance from the University of Queensland, and is a postdoctoral fellow in Applied Economics at Renmin University of China.
The Third Plenary Session of the 20th Central Committee of the Communist Party of China was held in Beijing from July 15 to 18, 2024.
The plenary session pointed out that opening up is a distinctive mark of China's modernization. We should steadily expand institutional opening up, deepen foreign trade system reform, deepen foreign investment and outbound investment management system reform, optimize regional opening layout, and improve the mechanism for promoting high-quality joint construction of the "Belt and Road".
As a RMB-denominated bond issued by overseas institutions in China, panda bonds have achieved remarkable results in recent years. According to statistics, the issuance volume of panda bonds in 2023 hit a record high, and the annual issuance scale exceeded the 150 billion yuan mark for the first time.
"Starting from 2022, except for the United States, major developed economies including Europe have raised interest rates. China's repeated interest rate cuts have made financing costs low, attracting many issuers to come to China to raise RMB and issue panda bonds." Yang Junhao, CEO of CCXGF International and Vice President of CCXAP, said in an exclusive interview with a reporter from 21st Century Business Herald recently.
Regarding Panda Bonds, Yang Junhao commented that it is one of the important breakthroughs in China's financial reform and opening up. He said that the positive results of Panda Bonds show that the function of RMB as a financing currency is constantly improving, especially in the context of continued foreign investment in China. With the development of the dual market structure of domestic Panda Bonds and overseas Dim Sum Bonds, the domestic and overseas international bond markets have their own characteristics, and the two complement each other and will achieve common development.
The plenary session pointed out that it is necessary to coordinate development and security, and implement various measures to prevent and resolve risks in key areas such as real estate, local government debt, and small and medium-sized financial institutions.
In recent months, the highly anticipated ultra-long-term special treasury bonds have been launched for sale and have been welcomed by the market. Yang Junhao commented that the issuance of ultra-long-term special treasury bonds will optimize the debt structure of the central and local governments, and part of the funds from the treasury bonds will be used by local governments, which can increase the fiscal space of local governments, especially in places with relatively high debt repayment pressure, certain debt risks, and relatively backward economic development.
From the demand side, "Since the beginning of this year, non-bank institutions including insurance, wealth management, and funds have had a strong demand for ultra-long-term treasury bonds. Ultra-long-term treasury bonds not only meet the investment needs of market institutions for ultra-long-term bonds, but also balance the supply relationship in the treasury bond market. At the same time, the supply of government bonds also increases the liquidity of medium- and long-term investments." Yang Junhao added.
Yang Junhao also pointed out that the issuance of ultra-long-term government bonds and policy bank bonds will accelerate in the future. "We expect that the issuance of government bonds and policy bank bonds will reach a peak in the third quarter."
01Non-bank institutions have strong demand for ultra-long-term government bonds
21st Century : On June 14, China's Ministry of Finance issued 50-year special bonds for the first time, with a total issuance of 35 billion yuan. What do you think of the significance of China's issuance of special bonds? What market impacts are expected to be brought?
Yang Junhao : This year's "Government Work Report" mentioned that the ultra-long-term special treasury bonds will be used specifically for the implementation of major national strategies and the construction of security capabilities in key areas. This is China's fourth issuance of special treasury bonds, and the estimated issuance scale this year is 1 trillion yuan.
I believe that the ultra-long-term special treasury bonds release a positive fiscal policy, which will help boost current market confidence and expectations. First, the funds raised from the treasury bonds will be used for scientific and technological innovation, urban-rural integration, regional coordinated development, food and energy security, and high-quality population development. Measures in these key areas will help expand total demand in the short term, and in the long term will help promote the transformation of new and old economic drivers, build a modern industrial system, and develop new quality productivity.
Secondly, I think that in the short term, the issuance of ultra-long-term special government bonds will have a relatively small impact on the fiscal budget, because special government bonds are not included in the deficit, and their issuance is only included in the management of the government bond balance limit for the year. However, it should be noted that the issuance of long-term government bonds will increase the leverage ratio of the central government. According to our preliminary calculations, the issuance of 1 trillion yuan of special government bonds this year will increase the leverage ratio of the central government by about 0.7 percentage points, reaching 25.5% for the whole year.
In addition, the issuance of ultra-long-term special treasury bonds will also optimize the debt structure of the central and local governments. Part of the funds from the treasury bonds will be used by local governments, which can increase the fiscal space of local governments, especially those with heavy debt repayment pressure, certain debt risks, and relatively backward economic development.
It can be seen from the "Government Work Report" that special government bonds will continue to be issued, which also lays the foundation for the proactive fiscal policy in the next few years, which will help boost market confidence, ensure the stability of expectations, and further optimize the debt relationship between the central government and local governments, and reduce the fiscal pressure and expenditure of local governments. The launch of government bonds and the acceleration of special bonds are carried out simultaneously.
From the perspective of market impact, we have already collected some positive signals. Since the beginning of this year, non-bank institutions including insurance, wealth management, funds, etc. have shown strong demand for ultra-long-term government bonds. Ultra-long-term government bonds not only meet the investment needs of market institutions for ultra-long-term bonds and balance the supply relationship in the government bond market, but also increase the liquidity of medium- and long-term investments. Next, we expect the issuance of ultra-long-term government bonds and policy bank bonds to accelerate. It is expected that the issuance of government bonds and policy bank bonds will reach a peak in the third quarter.
Overall, ultra-long-term government bonds send positive fiscal policy signals. Their impact is not only on the bond market, but also on the entire financial market, sending more positive signals.
21st Century: CCXAP Credit Rating Co., Ltd. believes that if the trend of interest rate differential inversion remains unchanged in the next three quarters of this year, the scale of offshore RMB bond issuance should continue the momentum of the first quarter of this year. Could you please elaborate on how the offshore RMB bond issuance market will develop in the future? What are the important influencing factors?
Yang Junhao : The year-on-year and month-on-month data of the US CPI in the fourth quarter of last year showed that the US inflation control was still good. Therefore, the Federal Reserve did not raise interest rates in the first quarter of this year, and even expressed its intention to cut interest rates soon. At that time, the market generally believed that the Federal Reserve would start to cut interest rates in the middle of this year, so the US Treasury yield has been falling, and the bond yields in the market have begun to rise.
However, in the first quarter of this year, the US CPI data always exceeded expectations, which made the Fed a bit passive. The Fed has to control the overall CPI data and meet economic development, and has been unable to finalize the specific time of interest rate cuts. The market's expectations for the first interest rate cut have also begun to move back. Some believe that it may be at the end of 2024, while others believe that the entire channel of interest rate hikes has not yet ended, which has affected the market's expectations for US bonds.
At the same time, China began to introduce a relatively loose monetary policy in the first quarter of this year to reverse expectations of deflation and change the current situation of sluggish consumption. For example, the People's Bank of China announced a cut in the reserve requirement ratio and loan interest rates in January to promote a reduction in overall social financing costs. These policies pushed China's treasury bond yields to continue to decline in the first quarter, further deepening the inverted interest rate gap between China and the United States.
In 2023, about 350 offshore RMB bonds were issued, totaling about 30 billion yuan, of which about 150, totaling about 8 billion yuan, were issued in the last four quarters. According to data from the first quarter of this year, more than 150 offshore RMB bonds have been issued, totaling more than 9 billion yuan, and the year-on-year growth rate has reached 100%. This is the growth momentum we have seen.
I believe that the momentum of offshore RMB bond issuance will continue in the coming year. The Fed's outlook on interest rates will be an influencing factor. If the Fed quickly reverses to a rate cut trend, the RMB financing cost advantage may be weakened.
On the other hand, if the policy level further tightens restrictions on the overseas financing review system for municipal investment companies, then as an important issuer of offshore RMB bonds, its issuance volume will also affect the overall issuance scale of offshore RMB bonds.
02Interest rate differential between China and other countries promotes the issuance of panda bonds
"21st Century": Please talk about the relationship between "dim sum bonds" and the internationalization of the RMB.
Yang Junhao : Dim sum bonds first appeared in 2007, and after so many years of development, they have become a major bond variety. The Federal Reserve has raised interest rates seven times in a row in 2022, and the gradual increase in the cost of the US dollar has promoted the rapid development of dim sum bonds.
Of course, the development of dim sum bonds is closely related to the internationalization of the RMB. The opening and development of the dim sum bond market has made the RMB an important currency, which has not only increased the international acceptance of the RMB, but also increased the settlement and savings functions of the RMB.
In addition, as dim sum bonds continue to develop and improve, more international funds will invest in China through dim sum bonds, join the Chinese bond market, and invest in China's overall financial market. This increases the liquidity of the RMB in the international market, especially cross-border liquidity.
At present, the scale of dim sum bonds has increased significantly, attracting many international investors and foreign institutions such as sovereign funds and pension insurance companies to invest in China. Their participation has made China’s bond market more diversified and increased the market’s ability to resist risks. Improved its stability.
With the development of the dual market structure of domestic panda bonds and overseas dim sum bonds, the international bond markets at home and abroad have their own characteristics, which can be said to complement each other and develop together. Among them, dim sum bonds are more conducive to the expansion of cross-border RMB and play a greater role in helping the two-way opening of the domestic capital market. At the same time, the offshore RMB pricing environment is also more conducive to investors' risk management of exchange rate fluctuations.
"21st Century": According to statistics, the issuance volume of panda bonds in 2023 hit a record high, and the annual issuance scale exceeded the 150 billion yuan mark for the first time. Considering the current interest rate environment, how do you think the market outlook for Panda Bonds will develop? How to attract more overseas issuers to participate in panda bonds?
Yang Junhao : Panda bonds have been very popular recently, mainly due to the interest rate differential between China and developed economies in monetary policy. Starting from 2022, except for the United States, major developed economies including Europe have raised interest rates. China's repeated interest rate cuts have made financing costs low, attracting many issuers to come to China to raise RMB and issue panda bonds. This is the main feature of panda bonds, and the interest rate differential is the main reason for its high issuance volume.
We believe that Panda Bonds are one of the important breakthroughs in China's financial reform and opening up. The function of RMB as a financing currency is constantly improving and strengthening, especially against the backdrop of continued foreign investment in China. With the internationalization of RMB, the frequency of RMB use in cross-border payments, foreign exchange reserves, financial transactions, currency swaps and other fields is increasing, and overseas institutions are also more interested in raising funds by issuing RMB-denominated bonds.
Especially since 2023, we have observed that Russia, India, France and other countries have begun to use RMB in foreign trade transactions and investment and financing. Argentina also announced that it would use RMB to repay foreign debt for the first time. These are all very positive market signals.
According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), in May 2024, the RMB remained the world's fourth most active currency in the global payment currency ranking based on amount statistics, which means that the RMB's global payment ranking has remained fourth in the world for seven consecutive months. I think the popularity of panda bonds is not only due to the advantage of interest rate spreads, but also closely related to China's macroeconomic development strategy and China's degree of opening up to the outside world.
03The international recognition of Chinese rating agencies continues to increase
"21st Century": How do you evaluate the degree of openness of China's bond market?
Yang Junhao : Overall, since the fourth quarter of last year, foreign institutions’ holdings of inter-bank bonds have continued to increase.
Specifically, from September 2023 to April 2024, the cumulative increase in positions held by overseas institutions each month reached 820 billion yuan, setting a new high since February 2022. Judging from the transaction situation, the trading activity of overseas institutions has also increased significantly.
In March this year, the transaction volume through CCDC was close to 2 trillion yuan, of which about 1 trillion yuan was through the "Global Connect" channel and the "Bond Connect" channel exceeded 800 billion yuan. The total volume has increased by more than 500 billion yuan compared with February.
We believe that there are several main reasons for this trend. First, China's fundamentals are relatively stable. The government's relatively loose monetary policy and proactive fiscal policy have led to steady economic growth, which is our biggest advantage. Chinese bonds also have the natural function of diversifying risks and have a low correlation with other types of global assets. This is one of the main reasons why domestic and foreign investors choose to invest in Chinese bonds.
Second, since 2019, Chinese bonds have been included in the Bloomberg Barclays Global Aggregate Index (BBGA), the JPMorgan Emerging Markets Bond Index (EMBI), the FTSE World Government Bond Index (WGBI) and other indices. Therefore, international investors have increased their holdings of Chinese bonds when investing passively, bringing in more international funds, especially institutional investors. This is a very favorable growth.
Third, China’s financial market is relatively mature, and many foreign investors are also very good at using financial derivatives such as swap lines to hedge the risks of new bond positions. This also provides foreign investors with more protection and investment tools. Richer.
Fourth, compared with other emerging sovereign economies, China’s sovereign risk is very low. Recently, as the geopolitical situation has escalated, more and more foreign investors are more inclined to invest in bonds in China.
"21st Century": What is the current social recognition, especially international recognition, of Chinese-funded rating agencies?
Yang Junhao : At present, the international recognition of Chinese-funded rating agencies is constantly increasing. From the perspective of market share, starting from the second half of 2022, with the support of regulatory policies, the business of Chinese-funded overseas rating agencies has grown significantly. In terms of business volume, the number of new customers of Chinese-funded rating agencies has exceeded 200 in 2023, an increase of two times compared with 2022, and the number of existing customers has exceeded 300, an increase of nearly three times compared with 2022.
With the rapid development of China's overseas bond market, CCXAP's business has also achieved significant improvement. As of the end of April this year, our company has more than 200 existing rating entities and more than 30 debt ratings. This also shows the market recognition of Chinese rating agencies.
It is worth mentioning that CCXAP obtained the business qualification from the Hong Kong Mandatory Provident Fund Schemes Authority ("Hong Kong Provident Fund Authority") in March 2023, becoming the first Chinese-funded credit rating agency approved by it. The five rating agencies are all foreign-funded institutions. This represents the recognition of our company by very large investment entities.
The current investment scale of the entire MPF (Hong Kong Mandatory Provident Fund) is approximately HK$1 trillion, of which 20 to 30% is invested in the bond market. With the participation of Chinese rating agencies, I believe that the market areas of Chinese issuers will receive more attention, such as Chinese dollar bonds, and our company will also increase its allocation in this area. I think this is also very helpful for professional investment institutions like MPF to make longer-term development decisions.
