Hong Kong should introduce yuan fixed income products, such as real estate investment trusts (REITs), before launching initial public offers (IPOs) denominated in the Chinese currency, Secretary for Financial Services and the Treasury K.C. Chan said on Tuesday.

The city is quickly developing as an offshore hub for yuan business, supported by the Central Government's pronounced efforts to internationalize its currency in a bid to reduce the forex risks faced by its huge foreign exchange reserves.

Yuan deposits in the city have been rising sharply in recent months mainly due to an increase in yuan trade settlements. But the rapid expansion of the yuan deposit base has been in sharp contrast to the growth of investible assets, which is limited to only bonds and a few other money market instruments.

Efforts to expand the offshore yuan asset menu have been hobbled by the lack of a vibrant secondary market.

"We should first launch bonds with fixed incomes, REITs or any fixed income products because they are relatively easier to introduce and don't need to rely on market transactions," Chan said in a statement.

REITs invest in mainly commercial property and pay rent collected from their properties to shareholders as a dividend, usually offering returns that are higher than yields of government bonds.

Hong Kong tycoon Li Ka-shing has been pushing ahead with a $1.5 billion yuan IPO, which would be the first in the city, with the issue's bond-like REIT structure likely to allow it to get around the limited liquidity pool.

"In terms of what comes first and what comes after, I think we need to have a mature and stable secondary market mechanism before we can (launch yuan IPOs)," Chan said.

Hong Kong's yuan deposits quadrupled to 315 billion yuan ($47 billion) at the end of December from a year ago and market watchers say the deposit pool must rise to at least 500 billion yuan before stock IPOs could be done on a sustainable basis.

Still, demand for so-called "dim sum" bonds or bonds denominated in yuan has been brisk, with investors keenly awaiting the launch of yuan IPOs in the city, a hotbed for listings last year.

China Daily - Reuters

(HK Edition 02/09/2011 page2)