For the first time since 2004, China issued a euro-denominated bond. The Chinese Ministry of Finance raised €4 billion this week by issuing new debt at less than half a percent interest rate. Demand for these bonds was very high, as investors were willing to lend nearly €20 billion. In particular the seven-year bonds were in strong demand.
The low interest rates in the Eurozone make it more attractive for China to borrow in euro. By way of comparison, for 10-year government bonds in yuan, the Chinese government pays about 3% interest. In addition, China trades a lot with Europe, making it easy for it to use euros in its trade.
Borrowing in other currencies
This is not the first time that China has borrowed in foreign currency. In recent years, it has also borrowed a few billion in US dollars. A dollar bond auction is also planned this month, but due to the trade conflict with the United States, China is now also looking for other sources of financing.
Another reason is that China has a dollar problem. The Chinese economy has a lot of debts in dollars and has to roll them over continuously. In order to reduce its dependence, China is looking for more diversification into other currencies. We see this auction of Eurobonds as a strategic move to strengthen the trade relationship with Europe.
Euro as an international trading currency
Last summer we wrote on Geotrendlines that China now uses many euros for trade with Russia. And last month the central banks of China and the Eurozone extended their currency swap for another three years. This also shows the two trading blocs want to strengthen their cooperation.