Hungary Issues Sovereign Bonds Denominated In Yuan: Another Nail In US Reserve Currency Status?

Tyler Durden's picture

Submitted by Mike "Mish" Shedlock

Hungary has become the first Eastern European country to issue a yuan-denominated sovereign bond.

The deal that shows how currying favor with China may be a more important driver for the market than funding.

Reader Steve who sent me the story commented on Hungarian mortgages denominated in Swiss Francs only to see the  Franc jump over 20% in value overnight.

“Pretty clever guys!”, said Steve.

Anyone think this is a good idea?

The Wall Street Journal reports Hungary to Issue Dim-Sum Bond as It Seeks to Curry Favor With China.

Hungary priced the three-year bond at a yield of 6.25%, raising 1 billion yuan ($154 million), a small size for a sovereign deal. Bankers not involved in the transaction estimate that if Hungary issued debt in U.S. dollars and swapped the proceeds into yuan, it would have paid almost 1% less in annual interest costs.

 

The dim-sum market isn’t an appealing market right now. Issuance of offshore yuan bonds has been falling consistently since Beijing’s decision to devalue its currency by 2% in August last year—the prospect of another yuan devaluation has sapped much of the appeal of such bonds for offshore investors.

 

However, Ivan Chung, an associate managing director at Moody’s Investors Service, said selling yuan-denominated sovereign debt promotes Hungary as a yuan hub, partly by establishing a benchmark off which Hungarian firms can issue their own yuan bonds.

 

Bank of China opened a yuan clearing center in Budapest last October, according to China’s Xinhua News Agency, in a ceremony involving the Hungarian Prime Minister Viktor Orban and the Bank of China chairman Tian Guoli. In January this year Hungary mandated Bank of China solely for its offshore yuan bond.

 

This follows a pattern seen in other places. The United Kingdom issued a 3 billion offshore yuan bond in October 2014, four months after China Construction Bank said it would launch yuan clearing in London, setting up that center as a yuan-trading hub.

 

Sovereign dim-sum issuance also generates goodwill with China, which wants to see more cross-border finance done in yuan. In November 2013, the Canadian province of British Columbia issued a 2.5 billion one-year offshore yuan bond. The small size and short tenor didn’t do much for the province’s finances, but a banker who ran the deal said the offer promoted B.C.’s trade relations with China.

 

Hungary plausibly had a similar objective with its dim sum. In June 2015, Hungary was the first European country to sign a cooperation agreement for China’s “One Belt, One Road” initiative, launched with $40 billion in funding, to develop trade and transport infrastructure across Asia and beyond. This will likely mean Hungary will get linked to, and therefore benefit

 

from, China’s infrastructure projects, and might even participate in contracts for such works.

 

“Hungary could use yuan to settle the trade or investment involved, such as payment for China construction firms and equipment, which could help to reduce foreign-exchange risks,” Mr. Chung added.

Valid Hedging Strategy

If corporations seek yuan-denominated bonds to mitigate currency hedging risk, such bonds may make sense.

Hedging is quite the opposite of individuals taking 30-year mortgages in other currencies.

Having a foreign-currency denominated mortgage is a purely speculative play that can (and did) blow sky high.

That said, once these things start, who knows where speculators will take them.

 

Another Nail in US Reserve Currency Status?

Some may trump this up as another nail in the US dollar coffin. However, in the grand scheme of things, this announcement is essentially meaningless to the US due to its small size.

Besides, having the world’s reserve currency is as much of a curse as it is a blessing.

Incidentally, Hungary's announcement follows a comparable announcement by Nigeria which last week become only the second nation after South Korea to sell yuan-denominated debt in China’s domestic market as it seeks to cut borrowing costs while plugging a record record budget deficit, Bloomberg reported.

The dollar-deprived West African nation may shun the Eurobond market, opting instead for renminbi or yen bonds, according to Finance Minister Kemi Adeosun. The government wants to raise as much as $1 billion in international capital markets to finance a deficit that’s forecast to be about 2.2 trillion naira ($11.1 billion) this year, she said April 9.

“We are finding that, indicatively, the renminbi market may be cheaper than the Eurobond market,” Adeosun told reporters in Lagos, the commercial capital. “We are shopping around for the best deals.”

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mantrid's picture

funny, I remember Mish repeatedly stating that hopes for yuan replacing dollars is BS because Chineese bond marekt is too small and Beijing can't be trusted. apparaently attitude changes. that's good.

KnuckleDragger-X's picture

Not really, but it's the cleanest turd in the pile, and as long as China doesnt fuck up too bad, it's probably a good bet short term. Long term, it comes down to international exchange markets, you know, pure and virginal, with no manipulation............

Absalon's picture

you need to go back and re-read the article

Lorca's Novena's picture

What gives Hungary? Everyone knows the yuan is worthless fiat crap.  Why not partner with your friends above china?

RopeADope's picture

I believe that you answered your question.

Antifaschistische's picture

note: I have no expertise in this subject.

However, if all the "smart Hedgy boy's" are guaranteeing a collapse in the RMB, isn't the Yuan Debt a damn good idea? Perhaps something others should follow?

The tremors here also represent why America's almost guaranteed future protectionist trade strategies will not guarantee a resurgence of American jobs...the WORLD is going elsewhere...and that my friends is something we can't stop.

KnuckleDragger-X's picture

Actually, depending on how they pay, a Yuan collapse would be good for Hungary.......

AGuy's picture

"What gives Hungary? Everyone knows the yuan is worthless fiat crap."

What better way to borrow, then in a currency that is depreciating. You get to pay less back then you borrowed. On the other hand. Most foriegn currencies are depreciating against the dollar (ie Canada, Brazil, Ruble, & Yuan). Those foreigners that borrowed in dollars have seen there borrowing cost get worse because of the dollar increase in value. I believe the Yuan has devalued about 30% in the past year. I think its likely to fall another 60% or more as the China debt bubble implodes.

That said, the dollar is crap, but many of the other foriegn currencies are even crapper, having adopted the same practices & financial policies as the US. The dollar will likely continue to increase until the Fed restart QE.

conraddobler's picture

This is a great way to die a horrible financial death.

Sure when you do this it sounds good as it's usually done in a currency everyone believes will depreciate.  However you yourself as a nation do not control this and I can't tell you how fucking horrible an idea it is to do this because of that small detail.

Giving free samples is a very ancient sales trick and works fantastic with heroin.

Absalon's picture

What is driving this deal is precisely that Hungary is expecting the Yuan to fall between now and when they have to repay the principal.

skinwalker's picture

As a nation, Hungary is largely irrelevant. However, I'm unfairly biased agaisnt it as I once got kicked in the balls in budapest. 

monk27's picture

Yeah, they have this habit. Last year the Hungarians kicked Merkel "in her balls" so to speak, when they stopped the "refugees" from crossing into their country... 

Able Ape's picture

What dim-witted, kumquat buys sovereign paper?  Even a lobotomized sea cucumber knows BETTER than that!...

Tinky's picture

Stop with the disparaging sea cucumber remarks. I believe that one recently demolished Krugman in a debate.

skinwalker's picture

Sea cucumbers are considered a delicacy in some parts. Kumquats too. So at least they do something useful...

Kagemusho's picture

The Yuan has been devalued repeatedly over the past few months, but come Tuesday the Chinese open their Shanghai Gold Exchange, where phys Au is traded for Yuan. Those bonds could rise in value with the value of the Yuan. Maybe Buda-Pesht (it's actually 2 cities) will become a major financial hub in Eastern Europe?

HectorCamachoTrump's picture
HectorCamachoTrump (not verified) Kagemusho Apr 17, 2016 9:55 AM

They don't have enough physical to trade.

Get a clue, artard.

skinwalker's picture

Have you ever considered extreme anal stretching as a form of stress relief? Harvard did a study on it. 

HectorCamachoTrump's picture
HectorCamachoTrump (not verified) skinwalker Apr 17, 2016 10:34 AM

I took A & P.
The anus is an outflow pipe. The way the intestines twist pushes fecal marerial out of the body after processing. True carnivores have expedited digestion having a shorter lower digestive tract. Humans tale a bit longe on the proper diet....

Anyway, there is nothing normal about anal sex. It is male homo sexuality practiced by lower life forms taken to its most extreme without even the benefit of procreation.

It is a devient and immoral use of the human body and shows moral genetic decay in humans that possess it.

Sorry.

RopeADope's picture

It is not genetic.

It is environmental influence that causes it, as evidenced by a significantly higher rate of homo sexuality in younger brothers vs older brothers. The eldest is the preferred and receives more economic advantage compared to the younger.

Today we see an increase in non standard behavior because economic resources are being highly concentrated within a smaller population group as well as having globalization increasing the overall competition for resources.

HectorCamachoTrump's picture
HectorCamachoTrump (not verified) RopeADope Apr 17, 2016 11:37 AM

"It is not genetic"

Wow heck of a rebuttle.

"It is environmental influence that causes it, as evidenced by a significantly higher rate of homo sexuality in younger brothers vs older brothers. The eldest is the preferred and receives more economic advantage compared to the younger.
"
Genes are influenced by environment, so?

And what does this have to do with homosexuality?
All homos are narcissists. They are telling the world how awesome it is to be devient.
Homos in the wild don't reproduce. For that in hollywood you need scientology. Works for travolta.

"Today we see an increase in non standard behavior because economic resources are being highly concentrated within a smaller population group as well as having globalization increasing the overall competition for resources.
"

Or there are more people, devient people repoducing at an alarming rate.

ebear's picture

"Or there are more people, devient people repoducing at an alarming rate."

For a genetic trait to be passed on there has to be sexual reproduction, so then, please explain to us how homosexuals reproduce.

Oh, and while we're talking science, please explain to us again how sheep's bladders can be used to prevent earthquakes. The people of Japan would be most grateful for that information.

HectorCamachoTrump's picture
HectorCamachoTrump (not verified) ebear Apr 17, 2016 2:54 PM

"For a genetic trait to be passed on there has to be sexual reproduction, so then, please explain to us how homosexuals reproduce."

Faggot deviants have always reproduced. It part of their moral insanity.

"Oh, and while we're talking science, please explain to us again how sheep's bladders can be used to prevent earthquakes. The people of Japan would be most grateful for that information."

Dunno. Don't know what context this has to do with butt pirates.

Seems you have a genetic trait of homofury. Very common as the lowest common denominator reproduces.

Started with the boomers. Scum that they are...

ebear's picture

Seems to me those that bitch the loudest about homosexuality are really just in denial about their own latent gayness.

Faggot.

Tinky's picture

Are you really that dumb? Apparently it hasn't occured to you that the vagina is also an "outflow" pipe, through which menstrual fluid, you, and every other human being on the planet emerges/emerged from. Yet low and fucking behold, it is also penetrated during what you consider to be the only type of "normal" sex.

Try preaching your puritan nonsense elsewhere.

 

HectorCamachoTrump's picture
HectorCamachoTrump (not verified) Tinky Apr 17, 2016 2:50 PM

The vagina was created specificially for sperm to create a fetus input.

The anus, again, is an outflow pipe.

No children are created by buttsex.
Sorry.

This isn't a hard concept.

Except for cock sucking faggots/liberals.

Tinky's picture

By that (tortured) logic, oral sex is also some sort of "sin".

As I said, take your religious, moralizing crap elsewhere.

J Jason Djfmam's picture

Nothing butt little brown smelly children.

Kayman's picture

"but come Tuesday the Chinese open their Shanghai Gold Exchange, where phys Au is traded for Yuan."

Let me know when the Chinese sell gold bars for yuan.  And let me know how long they can keep it up. 

Kagemusho's picture

They will sell those kilobars to the high-end buyers. Low-end buyers will have to do with Gold Pandas...just as any Western stacker does with local PM coinage. But the Chinese are making it clear that it will be Yuan, not dollars, that passes hands.

Today the Yuan is devalued, in contrast to the dollar. That is almost certainly to change, however, as by pegging gold purchases to Yuan, for all intents and purposes, puts the Feds and their Treasury handmaidens in a put-up-or-shut-up position: either there is a US gold repository, or there isn't. It's 'show and tell' time, and I suspect Uncle Sam will become more shy than ever about showing what he's got.

I also suspect that the Chinese only joined the LBMA not only to keep the price low in the meantime but to essentially take it over for the coming shifting of financial gravity from London/New York/Vatican to Beijing.

There's an old Chinese curse that goes "May you live in interesting times."  ('Interesting times' like wars, famines, floods, earthquakes, financial catastrophes, etc. are interesting.) Things are going to get a lot more 'interesting' before too long.

markovchainey's picture

Damn it, now I want dim sum. 

HectorCamachoTrump's picture
HectorCamachoTrump (not verified) Apr 17, 2016 9:56 AM

Lmao!

The forint is worth .0036 to the dollar.

http://nomadcapitalist.com/2014/05/19/lessons-hungary-coming-economic-co...

Hungary was raped by the EU and their own corrupt politicians.
Now chinamart is bailing them out.

This is the first domino to fall in the eurozone to china. Just as the rothchilds predicted.

oncemore's picture

since several years it is 0.0036. And?

HUF is pegged to €.

the.ghost.of.22wmr's picture
the.ghost.of.22wmr (not verified) Apr 17, 2016 9:56 AM

Budapest may just experience a few moments of 5,000 degree weather because of this transgression.

quadraspleen's picture

 

 

War with Hungary in 3..2..1

Boondocker's picture

Oh yea,  China is going to save the world....

 

/sarc

PumpherDumper's picture

Reminds me of Jim Willie arguing that the value of the dollar would go up, and up, and then "poof" just disappear because no one would accept it anymore.

withglee's picture

If Hungary was smart it would issue bonds denominated in HULs (Hours of Unskilled Labor) and announce and prove it is doing so under a properly managed MOE process.

With such a process they could guarantee zero INTEREST load on responsible traders  (and penalize deadbeat traders with high INTEREST loads). They could guarantee zero INFLATION of their Medium of Exchange (MOE). They could guarantee free supply of their MOE to all responsible traders. They would create an MOE which is a perpetually perfect store of value exhibiting zero INFLATION.

The downside for Hungary is "they would have to deliver on their own trading promises." Being a government, they obiously won't do that. No government ever has.

But whoever institutes a properly managed MOE process will drive the dollar, the yuan, and all other inferior MOEs out of business. They would not be able to compete.

opport.knocks's picture

Why not skilled labour, like hookers? The demand is bigger, but then so is the supply side.

withglee's picture

Skilled labor is subjective. We've all been unskilled labor at one time in our lives. It's a totally objective measure.

Davilis's picture

Bad for investors, good for Hungary. I bet Kyle Bass was NOT one of the buyers.

Amicus Curiae's picture

?? after  the earlier posts re china/yuan/gold..

then the new yuan may well rise?

in which case surely Hungary comes out well ahead of holding likely to crash usa$

??

tarabel's picture

 

 

Since they have to earn in zlotys or whater they use and then pay back in RMB, they would be well and truly screwed if RMB goes up.

Third World borrowers everyhere have been destroyed by rising value in the currency their loans are denominated in. It's one of the biggest reasons why everyone keeps begging the Fed to not raise raise any more.

To Hell In A Handbasket's picture

Back channel talks to politely dissuade the pesky Hungarians from doing something sensible, will inevitably lead to some kind of accusation that Viktor Orbán is an anti-Semite, racist, Nazi, crony to his wealthy industrialist friends, etc etc. The narrative has become so predictable, I know it before they even release the opinion piece in the bought and paid for press, not owned by the goyim. The west has become and reduced to a joke, corrupt to the core and starting to unravel at the fucking seams. The only thing sustaining it, is the controlling of the more frequently challenged narrative and a house of cards built on lies. 

Weisbrot's picture

we should all borrow in YUAN - as the Chinese bank collapses continue the YUAN will devalue MASSIVELY - pay back will be less than the amount borrowed in terms of most local currencies and/or metals

Space Animatoltipap's picture

The monetary problem is of course the WW, $ based, fiat money system. As a medium of exchange this system is totally untrustworthy. The funny thing is, specifically the "highly educated", "objective" and "reasonable" Westerers have HUGE faith in it. It's true, ignorance and megalomania are tough mental diseases.

Kayman's picture

So let's see the mechanics of this deal.

Hungary borrows Yuan. Ergo, can only buy stuff from China or must convert to USD or Euro. Unless, of course, Hungary adopts the Yuan as its' currency.

Must be some kind of inside joke.

GreatUncle's picture

can only buy stuff from China ... erm the west is 90%.