China to Liberalize Yuan Trading, An Ominous Sign

November 28, 2011

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From the WSJ:

“To boost the use of yuan offshore, we’ll continue accelerating the opening up of the domestic bond market by allowing more overseas entities to invest in it and expanding the volume of domestic entities’ bond issuance offshore,” Xie Duo, director general of financial markets at the People’s Bank of China, said at a global debt forum on Wednesday.

Last year, the government urged banks to raise capital from foreigners. Banks have since slid as investors realize they will face the brunt of Chinese policy mistakes that created a credit bubble.

When companies could not get favorable loans from domestic banks, grey or black markets, the Chinese government allowed companies to issue Dim Sum Bonds to foreigners via Hong Kong. By very definition, much of this paper is low quality.

Local governments have not been allowed to sell bonds to foreigners, depending on property sales for revenues, until recently as land prices have started to slide. Faced with large liabilities, sliding revenues, and rising demands for basic services, the central government is letting foreigners buy local government bonds.

Now, the government is looking to export still more Yuan to foreigners. I sense a pattern here: let’s fleece the foreigner. If China is selling, should we be buying?

Financial liberalization” has historically been a leading indicator of financial crises.

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