Feast of sovereign bonds a real gift

PUBLISHED : Saturday, 30 June, 2012, 12:00am
UPDATED : Saturday, 30 June, 2012, 12:00am


Bankers say the government's record 23 billion yuan (HK$28.2 billion) dim sum bond offer will boost the city as an offshore yuan trading centre and cement the renminbi as a true international currency.

The fourth China sovereign bond tender announced in the city on Thursday not only marks the largest offer in terms of size, it's also the first time that overseas central banks have been offered bonds. More than five central banks have subscribed to the two billion yuan tranche, meaning the yuan has started to become a reserve currency investment.

The HKMA did not say which central banks were taking up the offer, but sources told the South China Morning Post it was popular with central banks from Asia to Africa.

'This is better than expected as many central banks have not yet accepted currencies which aren't convertible as their reserve investment,' said Andrew Fung, executive director of Hang Seng Bank. 'At least some central banks are now taking the yuan seriously as a small part of their reserve currency. More central banks will do so in future as the mainland further liberalises the yuan.'

The yuan is not yet freely convertible, which is why a majority of central banks have not yet invested in the currency. They want to make sure their reserves are invested in liquid and freely traded currencies such as the US dollar, euro and yen. China since 2009 has gradually allowed the yuan to be used to settle cross-border trade and investment and ultimately wants the currency to become a reserve currency for major central banks. The euro-zone crisis and the low interest rate offered by US Treasuries have helped the yuan as an alternative asset.

'Beijing is now allowing Hong Kong to play the role of a gateway for overseas central banks to invest in dim sum bonds and other yuan assets,' Fung said.

A Thai central bank official has publicly said it is interested in buying dim sum bonds, signalling countries which have strong trade links with China have a greater interest in yuan assets. But not all are interested. Indian media have reported that the India central bank is concerned about the many restrictions on the yuan.

Another banker, who did not wish to be named, said it was natural for many central banks to think twice before investing their reserves in the yuan. 'If you invest in US Treasuries, they can easily be sold in any market. But can you do the same with the yuan bond?' the banker said, adding that some central banks might invest a small amount in yuan. 'But I do not see many major central banks rushing to it immediately. Not until China makes it fully convertible will central banks feel comfortable to hold a lot of yuan assets in their reserve,' he said.

Secretary for Financial Services and the Treasury Chan Ka-keung said the bond issue would strengthen the city as an offshore yuan trading centre. 'This is particularly significant for us because it will signify that Hong Kong will act as a gateway for Chinese sovereign bonds into overseas markets,' Chan said.

Mike Wong Ming-wai, chief executive of the Chamber of Hong Kong Listed Companies, said the offer was a step towards the yuan's internationalisation. 'With the expectation of a long-term appreciation of the yuan, central banks will be willing to invest. With Hong Kong being the issuing market, its position as the offshore centre will naturally be strengthened,' he said.

Hong Kong Investment Funds Association chairman Sally Wong said: 'There are already a number of countries that allocate a portion of their reserves for yuan. Even though it is still early days, we believe this will gain traction.'

15.5b yuan

The amount, in yuan, of dim sum bonds on offer to institutional investors