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| Two of America’s most prestigious companies have recently borrowed money that has to be paid back in Chinese currency. Does this new trend mean that the U.S. dollar will soon lose its reserve currency status? |
Caterpillar: Perhaps no U.S. company better personifies America’s industrial might. Giant excavators, bulldozers, backhoes, heavy machinery—the machines that helped build America. On Wednesday, the manufacturer of earthmoving equipment became the first multinational industrial corporation to borrow money that has to be paid back in Chinese currency. The company issued a 1 billion renminbi bond, which will have to be paid back in two years with interest.
The issue is only the second of its kind in U.S. history, and completely dwarfs a similar move made by McDonald’s in August. In that deal, the fast-food chain sold a bond for 200 million renminbi.
According to the Financial Times, Caterpillar’s deal “will give momentum to the … offshore market in renminbi-denominated debt.” Indications suggest that other U.S. companies will soon follow suit. There was so much demand for Caterpillar debt in China that seven times the amount of money Caterpillar sought to borrow was offered to it. The McDonald’s bond was three times oversubscribed.
Caterpillar has been building factories in China for three decades and employs more than 7,400 workers there. Caterpillar was the first heavy-equipment manufacturer from the United States to sell into China. This year, Chinese sales will contribute almost 10 percent of the company’s revenue.
Caterpillar’s bond sale is just the latest occurrence in a string of deals that is seeing China develop an international debt market that will compete with the U.S. dollar. On Monday, the Chinese government announced it would sell renminbi-denominated bonds for the second time in recent days in Hong Kong.
In February, for the first time, Chinese authorities made it possible for corporations from any country to issue bonds denominated in renminbi.
The Hong Kong stock exchange is also pushing to increase the use of the renminbi. It is working toward allowing companies to sell renminbi-denominated shares to international investors.
The Financial Times reports that banks and other financial institutions in Hong Kong have also rolled out insurance policies, certificates of deposit and hedging tools denominated in renminbi—the first such products available to foreign investors.
It is all part of China’s plan to cut its reliance on the U.S. dollar and make the renminbi more internationalized, says Charles Li, chief executive of Hong Kong Exchanges & Clearing. Although, it is just “a very small step in a very long march,” he noted.
Although the Chinese currency may not yet be ready to challenge the U.S. dollar, it is clear that Beijing is working toward that reality—and U.S. corporations and investors look set to help China along.
