Chinese bond sale tests international demand for yuan

Chinese bond sale tests international demand for yuan

China started selling yuan-denominated sovereign bonds in Hong Kong for the first time on Monday, testing international demand for its currency with the $879 million (Rs4,219 crore) issue as it moves to widen the yuan’s exposure and appeal to markets abroad.

Bank of China and Bank of Communications, the two lenders managing the 6 billion yuan sale, said in news releases on Monday that the two-year bonds would have a yield of 2.25%, and the three year bonds would yield 2.7%—higher rates than those offered to investors on the mainland.

Although no information was immediately available about how well the bonds were selling, analysts expected retail investors in Hong Kong would be interested in them.

The bonds are open to subscription until 20 October.

Zhi Ming Zhang, a currency analyst at HSBC in Hong Kong, cited investors’ “bullish feelings on the yuan," even if officials in Beijing are not expected to allow the currency to appreciate until exports recover.

The Chinese yuan, also known as the renminbi, does not float freely against other currencies, but has its exchange rate set by the Chinese authorities. US officials have long called for a freer float for the yuan, since keeping it low gives Chinese exports an advantage against goods denominated in other currencies.

But the debt sale also faces hurdles. It is limited to investors who have renminbi accounts in Hong Kong banks, which curtails potential demand. Hong Kong, the former British colony that has been a special administrative region of China since 1997, has its own currency, the Hong Kong dollar, which is pegged to its US counterpart.

And Hong Kong investors, wary after a scandal involving Lehman Brothers bonds last year, are more conscious of risks and have been subscribing to bond issues more slowly than they used to, Zhi said.

The sovereign bonds are unsecured, and are “backed by the full faith and credit of the Central People’s Government of the People’s Republic of China," according to the bank news releases Monday.

China’s National Day, the mainland equivalent of the Fourth of July in the United States, will be celebrated Thursday, and the timing of the sale may be an attempt to capitalize on patriotic sentiment among local investors.

The higher yields in Hong Kong—compared with mainland yields of 1.82% on two-year bonds, and 2.31% for three years—should also help shore up demand.

In July, China made three government bond sales, and fell short of its targets each time. At the ceremony kicking off the bond sale, vice-finance minister Li Yong said he believed “the yuan bond market will continue to develop and it will develop very quickly."

Still, Zhi said he did not expect Beijing to make any further moves to introduce yuan-denominated bonds internationally after the sale, whose results will be announced on 22 October.

China has been taking steps to promote the yuan in international markets this year, as the US dollar has weakened and Beijing’s foreign currency reserves have slid in value.