Vice Premier endorses Hong Kong's role

Hong Kong moved another step closer to its dream of becoming the primary offshore center for yuan products Tuesday after the Central Government affirmed the city's role as a "platform" for the internationalization of the yuan. It also helped establish a de facto yield curve for yuan products in the city.

Hong Kong is "in the best position" to help boost yuan internationalization, Hong Kong Monetary Authority (HKMA) Chief Executive Norman Chan, who was on an official trip to Beijing, quoted Vice Premier Wang Qishan as saying when briefing the media afterwards.

The Vice Premier's remark "has affirmed Hong Kong's role as the testing ground for yuan businesses", said Andrew Fung, general manager and head of treasury at Hang Seng Bank.

The remark coincided with Tuesday's launch of a second yuan bond issue in the city by the Ministry of Finance.

The ministry was selling 8 billion worth of yuan-denominated bonds with two-year, five-year and 10-year maturities. This will effectively launch a yield curve in the city that could become the benchmark used to price yuan debts and other yuan products in Hong Kong.

A range of maturities up to 10 years "will facilitate the formation of a reference yield curve in the Hong Kong yuan bond market," the Ministry of Finance said in a statement.

"This creates a yield curve and in Hong Kong it becomes kind of like the 'risk free' benchmark interest rate. People can use this as a reference for more corporate bonds in the future," Banny Lam, an economist with CCB International Securities in Hong Kong, said of the new issuance.

The portion of the yuan bond issue available for institutional investors was 5 billion yuan, which was 10 times subscribed. Through a tendering process, the coupon rate of the 2 billion yuan three-year tranche has been fixed at 1 percent, that of the 2 billion yuan five-year tranche at 1.8 percent and 1 billion yuan ten-year tranche at 2.48 percent.

Institutional investors showed great enthusiasm at Tuesday's bidding process, said Zhang Weizhong, head of the treasury department at Bank of Communications (Hong Kong), the agent for the institutional portion.

The three-year tranche was the most popular, attracting orders of 29 billion yuan versus the 2 billion yuan on offer. Rates proposed by institutional investors went as low as 0.5 percent, reflecting strong interest and confidence in the sovereign bond, said Zhang.

The 3 billion yuan tranche for retail investors will start subscriptions on December 07. The two-year bonds offer a coupon rate of 1.6 percent.

The significantly lower yields compared with those of their counterparts in the mainland market highlighted the strong demand for yuan products in the city. Government bonds with maturity of three years, five years and 10 years are currently trading at around 3.25 percent, 3.80 percent and 3.94 percent, respectively, in the mainland market.

Aside from yuan bonds, investors in the city have been snapping up almost every kind of yuan product, including yuan deposits, while local companies have been increasingly willing to accept yuan payments for trade balances with their mainland partners. This is in the hopes of benefiting from eventual and widely-anticipated yuan appreciation.

Yuan deposits in the city surged by 45.4 percent to 217.1 billion yuan at end-October from September, mainly due to an increase in yuan receipts by corporate customers through trade settlement transactions. The total remittance of yuan for cross-border trade settlement purposes more than doubled to 68.6 billion yuan in October from 30 billion yuan in September, according to figures released by the HKMA Tuesday.

Chan said the surge in yuan conversion for trade settlement purposes in the city was due to a genuine need for cross-border trade settlements and the People's Bank of China fully understands the current market situation, refuting reports that the surge was due to financial institutions and hedge funds' betting on yuan appreciation.

Reuters contributed to this story.

China Daily

(HK Edition 12/01/2010 page2)