China and other countries and have been buying gold as they worry about the long-term stability of the U.S. dollar. Large companies with those same fears may soon be able to tap the Chinese bond market to raise cash — and that’s bad news for dollar holders.
So called “panda bonds” can be issued by foreign companies using investment firms in China. For now, the money raised must remain in China. This is not a real problem for many multi-nationals which are investing in China anyway right now.
Last week, the Asian Development Bank reopened this bond market when it became the first company in three years to issue a panda bond. They raised $1 billion yuan, about $150 million dollars. The money will be used to fund clean energy projects in China.
The interest rate on the bond was surprisingly low, which reflects the stability of China’s monetary policy. The 10-year bond was priced to yield 4.2 percent. A similar bond issued in the United States would have to pay at least 4.3 percent and possibly more given the uncertain prospects of green companies.
This bond is very likely a sign that China intends to open its markets at least a little bit. In 2010, China is expected to allow foreign companies to trade directly in its stock market.
For years, the dollar was believed to be the only alternative for international finance. Panda bonds show that this could change. And that change could lead to even more declines in the dollar.
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