The Yuan Borrowing Boom and the Quiet Challenge to the Dollar

Whenever people say, oh, well, Treasury Secretary is taking a risk as well. It's my dream. I have asymmetric information. I am the house now. When we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan is going to do, what Japanese policy makers are going to do, and you bet against me if you want. You bet against me if you want. Two trailer park girls go around the outside, round the outside, round the outside. We got a boogie. Come on the way. Yeah, so what happened in playing English? So the Financial Times reports that offshore borrowing in China's currency has hit a record. It's a record of about $149 billion US dollars just so far in 2026. That's a lot. Look, that's a lot, right? So yeah, that's the headline. So far, just so far in 2026, the level of borrowing of the Chinese currency is extremely high. Now that, that's already more than the entire 2025. So these are extremely large numbers that we're talking about. This is no joke. And keep in mind that last year, just last year alone, that was also a record. Last year was a record. And now, this year to date, we've already surpassed that. So look, something is happening here. Let's go and have a bit of a nosing. All right. So two markets are doing the work. You've basically got dimsome bonds sold mainly into Hong Kong. And then you've got the panda bonds. And these are sold inside China by foreigners. So inside, mainland China by foreigners, complicated right? Stay with me. Let's figure this out. So dimsome issuance, right? So these are the bonds that are sold in Hong Kong. That's around 786 billion yuan this year. And panda issuance is about 232 billion yuan. So you can see the split there, right? 700, 232. My Beijing wants this. There are after this cheap Chinese rates, interest rates, plus official encouragement is how a currency, just like this, starts to live outside of its home country. A 10-year Chinese government bond yields around 1.68%. Yeah, that's not very much. That is a bargain in a world of five and six percent. Look at how you want. If you want to earn from bonds, then of course you want those high valued bonds. But if you want to learn these, look, you're after the lowest possible rate in the market. And Chinese rates are giving us that. So a 10-year Chinese government bond, 1.68%, a 10-year US treasury is about 4.78%. Wow. And that gap, it's the spread between the two, which is what we're interested in. Now that gap is at a record level. So that's why we're talking about this today. It is a significant, let's say, Fisher, it's a crack in the financial system. And it's starting to open up quite quickly. Yeah, when these things happen, we've got to pay attention. So let's just back up. Let's rewind because what I'm talking about can be a bit bloody confusing. For me, maybe for you. So bonds for normal people. So a bond basically is an IOU. You lent the issuer a lump of cash today. Don't get some money. You lent it to this party over there. They promise to pay you interest, and then they give you the lump sum back. Right, that's the deal. So we'll give you interest, and then we'll give you the original back. Now, face value, this term called face value, is a lump, is a lump on the certificate basically. So if the bond says $100, you want whatever it is, that is the face value. That certificate is a face value of $100 or $100, you want whatever. Now, that is what you usually get paid back at the end of the term, as long as nobody defaults, you know, under normal procedure. When you hand that thing back, they pay you back in full of face value. Now, the coupon, we use this term coupon all the time. Coupon is basically the interest, right? That's the interest that is printed on the face of the bond. A 1.78% coupon on a 100 yuan pays 1.78 yuan per year. Right, it's really, really simple. At its most simplest point, that's kind of how this bond system works. Yields is different. Yield is the real return that you get at today's market price. So if you buy that same bond for 95 yuan, go to the market, get somebody might sell it to you for a lower price than face. Yield is higher than the coupon because you paid less than face. Yes, I know it's a bit confusing, but I'm just trying to explain in the simplest language possible, how bonds work. If you buy it for 105 yuan, then your yield is lower, because then the coupon, because you've overpaid basically for the same income. Duration is inside the traders world, right? Duration is how much the price will jump when rates move, right? So how much does the price of the instrument move jump when the actual rates move? So longer bonds move more. A 30-year, dim sum note, is a bigger rate bet than a 3-year note. So there's a difference in the two notes and their duration credit spread. Let's have a look at this term. So that's the extra yield that you demand because the issuer might not pay. So that's when you say, actually, no, the spread's going to have to be a bit more. So for example, the Kazakhstan oil company is not the same risk as Goldman Sachs or JP Morgan, right? So and then the currency risk sits on top of all of this basically. So you might really love that 1.8% Yuan coupon. You love it. You're like, oh, I'll get some of that. But you're still losing dollars if the Yuan falls underneath you, right? You understand, like you might win when it comes to the yield that you're getting or the coupon that you're getting on the instrument. But underneath that, your currency fell away from you and up losing. So there's all this, I mean, it's bloody complicated. It seems really simple. It's a piece of paper with a face value and an agreed coupon. That's what you buy at a moment in time. You know, that's shit. That's easy. Right. I'll just buy this 10 year and I'll get my money back at the end of 10 years and I'll get the coupon paid out every year. Simple, right? It's not that simple, sadly. But it's bloody important because the miracle of modern finance runs on all that gobbledy goat that I just talked about. That was the non-technical version, believe it or not. That's about as simple as I can get it. But I wanted to go through those key points, the naming creature, the terminology. Just so we're on the same page as to how all this works. I'll keep iterating this so that we can sort of come together and understand how this works. It's bloody crucial that we, collectively, everybody needs to understand these principles of modern finance. All we're bugging. We really are bugging. So we need to know this sort of stuff. So how do the big bond traders actually think about this sort of stuff? So we've got the basics. Let's look at the experts. We'll go from down there at where my level is. Basic 101, too. Well, let's go to the top end. What do they think? So they don't start with, do I like China? Am I on team China? No. Do I like the British? No. Do I like America? No. Believe it or not, no. The answer is no. The big boys, right? And they start with these terms that I talked about. You know, actually more advanced terms like the carry costs, the hedge cost. And whether the book, their book, can hold that position over the duration. So they've got a very different perspective and quite a different naming creature. So carry, for example, is the income that you earn minus the cost. Yeah. So carry is the income you earn minus the cost of funding that position, right? Now check your own funding. Plus a slightly higher coupon is essentially carry. So that's an example. I'm not sure if that actually came through. But let's keep going. So they keep, for example, they can, they could ask, right? They could say, look, can I issue you arm at 1.8? Swap into dollars and still beat issuing a dollar bond at 5? Is that possible? They could ask, who's the bar, like on the phone, right? They'll be on the phone. Who's the bar? mainland insurers are hungry for anything about 1.7 and 1.7. And there are a much different bid from a London pension fund. Or something like that. They've got a very different risk profile. So I'm trying to explain the language and the naming culture around bonds. That's massive move in my view of bonds. So for a few more examples out there, what else might they say? So they could be like, can I print a billion dollars and 1 go? So Deutsche Bank's Samuel Fisher, he told the F-2 some time ago clients, wait until a 1 billion dollar print is proven before they move. So they're looking and waiting for the play, for the move to stabilize to a point where they're actually confident that it'll endure and that the direction is clear. So they'll wait for that. And they'll also ask, how ugly is the exit? So Simpson and Hong Kong, for example, is easier to sell than a small, some panda name that took four months on mainland marketing. That's a very different proposition. So they'll look at the, the quality of movement behind the instrument. Right, none of this is bloody difficult talking about all this crap. And if you don't know any about bonds, you're like, don't know what this guy's talking about. This is just rubbish. I mean, I get you. But the reason I'm going through this is because it's such an important move. So hang in there. Right. So yeah, bloody. Simpson versus Panda, right? Yeah. So Simpson is a UN debt. All right. UN is the currency China issued outside the mainland, outside of mainland China, mostly in Hong Kong. And, and, and, and, and offshore UN is known as CNH. They use the name CNH or the, the, the code CNH. Panda is a UN debt, but it's issued inside China by a foreign name. It's also in CNY instead of CNH. These are the codes that you, you're typing to the terminal to look it up. And Goldman issued tens of billions of UN of Simpson just this year. And it converts loads of it into dollars for global use. Now USD sold two billion UN of five year pandas. This is so serious. All right, pandas. And late August at one point, seven, seven point eight percent coupon. Now, at one point seven, eight percent, I should say. That is an all-girl, onshore paper, for the Swiss bank. So you can see there's quite a lot of, of serious movement happening in here. Like, you know, you've got Kazakhstan, Pakistan, Indonesia, 10 cents sold as 10 year, 30 year dim sum, state grid raised, 14.9 billion in one deal. Chinese firms still make up about two thirds of the dim sum. But they basically use it to pay overseas suppliers and to fund foreign operations in the same currency that those operations spend. Right, so that's one of the main purposes of this, is actually to accommodate cross-border transactions in UN. That there is a disagreement of itself. Obviously, a lot of activity is occurring outside of USD trade. It's now starting to occur in UN. And may be this rapid increase in demand for issuance of UN is linked to that. It's linked to, well, shit, the USD is a bit risky now because they, you know, what they did with Swift and with Russia. And, you know, you know, what they've done with Iran and with the USD dollar and all the sanctions and all the crazy shit. You know, facing it comes out and bullies people and bang, you know. So Trump comes out and he sanctions the world bang. So you've got the America used to be a very reliable stable, you know, head jam on. And now they're not. It's kind of as simple as that. So I think this may well be. This may well be a quite reasonable and quite astute, pragmatic, definitely pragmatic, or response to what happened in the last couple of years since Trump started a second term, and Trump man, holy crap. Yeah. So, well, but look, why this not euros? I think that's an important point. Euro bonds, right? So, price, borrowing under two percent, UN beats playing close to five percent, basically. And dollars. But you have to be able to live with UN, right? You get more diversification if you're already heavy in Euro bonds. If you're in a lot of dollars, this gives you like another way to diversify your bond portfolio. Yeah, so there's a bunch of reasons. I have a lot of reasons for investors to consider, consider buying this stuff. And what holds funds back from buying even more and even faster is the time to do that diligence, to do their homework, figure out if this is actually going to endure, how stable it is, how reliable it is. So, it's a bit of work involved in doing that sort of stuff. It takes time. But maybe a lot of that time has actually passed. And a lot of these funds are like, actually, we're starting to see some real issue in here. So, maybe this stuff is good enough to carry on our book. I think we have seen China bond market to be quite a beacon of stability so far as you have noted on some of the yield changes throughout this year so far. It's been quite a balanced flow picture, domestic banks, and some of the fund flows have been quite positive. And that anchors the demand for the issuance that have been put out by the government. Now, on the other hand, if you look at the global investor, that picture is a little bit more mixed. China is a very low yielding market in the context of most major markets and especially against the emerging market. So, that has been used more as a funder for other perhaps more volatile rates market that we have seen in the US and Europe and even Japan. On the issuer front, like you mentioned about Indonesia, they also want to issue in more markets as some of these spreads and funding picture could also be something that they can pick and choose from. So, China, in terms of panda bonds, that's growing. We also see that on the offshore CNX dim sum market, that is growing even more because that's participated by even more issuer and also by more investor. Even domestic investor, which traditionally invests in the onshore market, can access the dim sum market through some of these southbound connect programs. Yeah. That's kind of how I feel at the moment. Hello. Hello there, do not pat. Okay, I'm not patting. Okay, look, do not pat. All right, we're not patting now. Cute little bugger. He's off. Yeah. So, yeah, so look. The rhyme and the rhythm and the cadence of this whole thing. So, for decades, traders borrowed at near zero and bought Australian houses, New Zealand houses, US credit, emerging market bonds, basically anything that paid more than what they borrowed it because they borrowed nothing. It was at zero, below zero. And then you could go buy a house in Australia. And a bloody thing, we're up 25% a year. So, you know, the spread there is 25, 4% is points, which is bananas, bananas. And all I'm saying is I think those days are gone. You're not going to get the yen at zero. I think it's 27 at the moment, 2.7%. Well, we went from zero to 2.7 like an exponential. It's just like, I'll see if I can get the chart and stick it up here. But I'll tell you what, it was like an exponential like this. Whoa! Jesus, what's happening there in Japan? Jesus, Takaichi. What did you, was it Takaichi? Was it Takaichi? I don't know. But I tell you what, there's been a major shift. Major major shift there in Japan. Yeah, so the cadence of, so Japan is now hiking. That's basically what they're doing. Ten-year yields have climbed. You've just seen that. The old free lunch, we could borrow for nothing in Japan. And then use that elsewhere to basically to keep the spread. China is holding rates down hard to support a soft domestic economy. And maybe, that's probably the biggest lever that's actually driving all of this stuff. China holding rates down. Now, Goldman's, he shan told the F.T. The obvious, I'm just looking for a quote here. The obvious historical parallel, low rates make a currency attractive for funding. As the yen was in its long cheap era. Okay, that makes sense. BBVA has already said that offshore you are, could take some of that funding role if Japan keeps on tightening. Could is, I think, is a yuan carry trade could look like this. So, your issue or your borrow cheap C&H yuan Chinese currency, your borrow a real cheap, down the one-hour percent. And then you convert that. Your buy, buy, yielding, say, Brazilian or Turkish Lero, or US credit. And you basically keep the spread. You clip the ticket on the spread. So, that is an amazing trade. Plans love this sort of stuff. They've been doing it for years. It used to be called the yen carry trade. And I think instead of being called the yen carry trade, I think we might be looking at the start of the yuan carry trade. It's a slight difference. Right, yuan yuan. That's where we're heading. I think we're heading towards the yuan carry trade. I might be wrong. We'll see. We'll see. Difference from Japan is political. So, the yuan was the currency of an allied surplus nation. Right? Surplus country had received a lot of stuff to the Americas and got a lot of money back. Basically, huge exporter cars and, you know, so many play stations. Basically, they sold a lot of shit to America. They don't sell as much now. Most of it comes from China. So, they've kind of moved roles. It's transitioned rapidly. You're really rapidly, like holy shit. We are very fortunate, team. You're fortunate. I'm fortunate to see this stuff on our timeline. I can't believe it. Because it's happening so fast. We're literally able to see these moves. We're able to see these moves. There's the bridge. Oh, the white painting. You check these blocks out here. Can you see them over there? Yeah, they're doing a bit of white painting. That's pretty cool. Let's put a net in the water here. They get these little fish out cool white paint. Delicious little suckers. And make little fritters out of them. Put them in some oil, fry them up. Put a poached egg on top. Bloody hell. It's very good. It's very good. Yeah, this is the Bond story. And it is a... We are fortunate to see this with our own eyes. You're part of it. I'm part. I bloody love it. I can't believe it. Well, literally seeing this giant transition from the old world to this new China centric world. Now, that could be bad for us. I'm not saying it's a good thing. I'm just saying it's a thing. I'm saying it's a thing. And we're watching it. And it's a massive thing. Why this is a bigger shift than the dollar headline. I think that is a story here as well. So let's go and quick look at that and then we'll wrap. So reserve status is the last mile. Funding status is the first mile. People use a currency like the US dollar for trade and for borrowing long before central banks put that currency in a vault. Now, that's true. Now, trade finance in Yuan is already rising loans in Yuan of sure rising. And now the bond market is printing in absolute record levels. So every Goldman, UBS, Kassak, oil company, Pakistani ministry, that issues in Yuan creates a reason to hold Yuan to hedge Yuan and to provide clearance for Yuan. You know, Yuan is all of a sudden it is that key term that is being used by everybody. Everybody. I think that might be, I'm not saying the US dollar is dead. I bloody hope is not. I don't think that's the case. I think it has a long road to go. But we are seeing a monumental change in how debt is issued around the world. And where the appetite for debt is coming from? Yeah. And I think that's a real key. It's going to hop over here and see if I can see any whitebait running through the water here. If I can see some, I'll show you. I don't think so. But there's a little triumphant tree here. We'll see if we can see some because the water is quite clear. Now I'm basically a little silvery fish. No, I don't see any here. We keep looking. Yeah. Yeah, reserve. So look, I think the US dollar is going to be around for a long time, a long, long time. Yeah. So, yeah, US dollar, a long time. All these banks, Deutsche Bank, as a European clearer, bond connect quotas going up, mainland insurers coming south. All these sort of activities, they proved to me. Look, the dollar is not going anywhere, but we are seeing a major shift in issuance of bond, issuance of money to China. Just watching some seagulls over there and watching like I am. They're having a bit of a nosey to see if they can see any fish coming through. Yeah. Yeah, so there you go. Yeah, lots of risks. Risk, really, if this gets too big for its riches, then you end up with China basically being a financial hegemon or being a massive financial superpower. And look, we don't know. We do not know if China is a benevolent dictator. Are they a benevolent dictator? Are they going to be brutal? Are they going to be a brutal dictator? And are they going to be like not very friendly at all? We don't know. So far, they are not an aggressive... Yeah, they're going to have your people where I say this, but they're not overtly aggressive, right? They don't come and punch you in the face the way the Americans do. They will just come and bomb you with a B2. That's what the Americans will do. They'll bomb the living daylights out of you. And they'll threaten to nuke you 95 million people. The president of the United States of America literally, I mean, literally, it's written to annihilate Iran with 95 million people. And he can literally pull out the briefcase and order a nuclear strike. It's bizarre. It's crazy that that's still possible. But look, that's the way it is. That's how this... And look, all I'm saying is, you've got this currency which has stood the test of time, the US dollar. And you've now got this... What has so far been relatively benevolent, China. You've got this dictator, China, who is rising. Now, we don't know. I don't know. I believe you. They're not going to be benevolent. I think, you know, my gut tells me. There's no evidence, of course, but my gut tells me that. Yeah, I mean, when you've got a power that grows to be a regional hedgehog on, if it grows to have enormous power, then I don't think they stop. I don't think they stop wanting to get bigger and more powerful. I think they end up just consuming everything and then they consume themselves. I think that's how it works. It's like... Sour on in the little rings. It's kind of like that. You know, that's how I feel they are. I think right now they're not, but I think in time and a hundred years' time, I think they are. I think that will... They're appetite to consume the world will not be satiated. So, yeah, I'm not... I'm not a bull for long-term China, because I think they're a bit dangerous. I think anyone is. Not just China, but anybody who seeks to establish a total and absolute power and is not willing to stop. If you can stop at some point, then I think you're okay. But if you keep spreading your... You know, if you keep on pushing and you're going to try and consume all as much power as you possibly can, you end up taking too much power. I think that's when you get really dangerous, like America has all its bases all around the world. But if China stays in China and the South China Sea, if they stay there, then it could be amazing. It could be absolutely amazing. It could be the best thing ever. But I don't... I don't think... The little reading I've done on the subject, you know, these great powers, they don't tend to stop. They get a taste for it. And then they need to go and get more resources. They get resource starved and they want more and more and more. So look, maybe China's different. I don't know. I probably won't be able to find out. But I do think it's a question for... For us collectively, too. Keep an eye on this. This has been all about... Bonds. You aren't Bonds. This... Dim sum bond. The panda bond. These are the first two instruments. There'll be more. I think we're going to see this grow as significant rates of growth. Significant rates of growth. I don't know how fast it's going to grow. I suspect it's going to be quite shocking and quite surprising. And all of a sudden, you'll be able to get a U-1 to a nominated account at your bank here in the West. I think you'll know. When that happens, you'll know. Yeah. If you go into your bank app on your phone and all of a sudden you can add a second account and it's denominated in U-1, then you'll know. Just like you can on WISE, I think Revolut as well. If I go into my WISE card on my phone, I can just go right, add U-1. And I can just swap straightaway. I can swap like 50k into U-1. And it arrives in my things straightaway. And I can just hop off the plane in Beijing and go spend it in U-1. Native U-1 in China. That's crazy. When you can do that, you'll probably be able to do that. A small business will basically have a U-1 account because it's the people that sell it stuff that it relies on. They prefer to settle in U-1 across border. And also from your perspective, they'll give you two options. I'll say, yeah, sure. You know, you'll run your supplier and change in and they'll go, no problems. We can send you another 40 footer, full of the stuff that you want. Would you like to settle in dollars? It's got a 5% premium over U-1. What would you like to do? The order is $4.3 million. And can you say what I'm saying? Now, if you settle in dollars, there's a 5% surcharge. If you settle in U-1, there's no surcharge. What would you like to settle in sur? And you'll quickly figure this out. I promise you. I promise you. I promise you. You'll figure this out so quick. It's just not funny. Yeah. So I think the stuff is really coming fast. And I'm glad we're here to, you know, to explore it together. Bloody funny, right? I think it's fantastic. I think it's amazing. Yeah, the U-1. Oh, I think it's live. It was in a great auto. Thank you for watching.