Foreign banks get go-ahead to buy yuan bonds
In the latest effort by Beijing to internationalise the yuan, the People's Bank of China announced yesterday it would allow overseas institutions, including Hong Kong lenders, to invest in the mainland interbank bond market.
The pilot scheme will start with foreign central banks, clearing banks for cross-border yuan settlement in Hong Kong and Macau, and other international lenders involved in trade settlement. They will be allowed to use the mainland currency to invest in yuan-denominated government or corporate bonds subject to a quota granted by the PBOC, according to a statement on the central bank's website.
The plan, which comes into effect immediately, is intended to further enhance cross-border yuan settlement by giving the Chinese currency circulating overseas a better channel of being invested directly back in the mainland markets without having to go through middlemen.
Andrew Fung Hau-chung, general manager and head of treasury and investment of Hang Seng Bank, hailed the move as 'a breakthrough'.
'This new investment channel will encourage central banks to hold the yuan as a reserve currency, which will enhance its status as an international currency,' he said. 'For corporates and individuals, they will also benefit from the move by getting a higher interest rate,' Fung said. Currently, yuan deposits earn interest at about 0.865 per cent, but corporate and government yuan bonds can offer returns of 2 to 3 per cent.
'The new scheme will encourage more corporates and individuals to invest in yuan products. This will benefit Hong Kong as an offshore yuan trading centre,' Fung said, adding that Hang Seng Bank would apply to trade in mainland bonds.
This is the second recent step Beijing has made towards internationalising the yuan and establishing Hong Kong as the country's major yuan offshore business centre.
Last month, the PBOC and the Hong Kong Monetary Authority signed an accord to allow banks, fund houses and brokers to offer yuan investment products.
Beijing first approved use of the yuan to settle cross-border trade with Hong Kong in June last year, part of a drive to reduce the country's reliance on the US dollar.
'The launch opens up a channel for financial institutions in Hong Kong to use yuan funds to invest on the mainland. This will further promote the development of yuan trade settlement in Hong Kong, and enhance the attractiveness of yuan offshore business in the city,' said Norman Chan Tak-lam, HKMA chief executive.
Mark McCombe, the chief executive of HSBC's Hong Kong office, said yuan liberalisation would gain further momentum.
'Today's announcement is significant as it moves yuan dealings beyond trade-related transactions only. Yuan trade transactions amounted to 20 billion in the second quarter, a drop in the ocean compared with the 8.7 trillion worth of yuan bonds issued in China last year,' McCombe said.
