Posted by: Frederik Balfour on September 9, 2009
China’s yuan is set to move closer to becoming an international currency with the announcement by Beijing that it plans to raise $880 million in the first ever sovereign sale of yuan-denominated bonds in Hong Kong on September 28. Although the 6 billion yuan issue of so-called Panda Bonds is small change for a country which holds more than $1.2 trillion in foreign reserves, it is widely seen as an important step towards the full internationalization of the Chinese currency.
The deal announced by the Chinese finance ministry on its website on September 7 should come as no surprise as Beijing has long indicated its intention to create Hong Kong as the anointed offshore center for yuan financial instruments. State-owned banks including Bank of China and China Construction bank have already floated panda bonds in Hong Kong, while HSBC and Bank of East Asia became the first foreign banks to raise yuan in Hong Kong earlier in the summer, raising 2 billion and 4 billion yuan respectively. Hong Kong and Beijing also reached an agreement earlier in the year to allow companies to settle trade in yuan, which is only partially convertible. Both HSBC and Standard Chartered Bank have said they plan to raise yuan by selling bonds in Shanghai once Beijing gives them the green light.
The sovereign offering later this month is likely to be well received. Though the coupon rate hasn’t been announced yet, it is bound to be at least 2%, offering an attractive yield to Hong Kong investors who are earning virtually nothing from bank deposits. The yuan is also likely to strengthen against the Hong Kong dollar in the coming years, offering an additional return to holders of the bonds.
In the past several years the yuan has become increasingly commonplace in Hong Kong thanks to the influx of Chinese tourists and business visitors. Hong Kong cabbies, Starbucks and hotels, as well as luxury purveyors like Louis Vuitton and Christian Dior all readily accept Chinese cash, as most mainlanders are allergic to the use of credit cards, preferring instead to arrive with suitcases full of yuan. Countries like Vietnam, which do lots of border trade with China [much of it illegal] also accept yuan as settlement.