London challenges Hong Kong with BOC's yuan bond

Bank of China's London branch yesterday made a landmark bond issue, underscoring the city's potential as a hub of yuan fundraising for European debt issuers and posing a threat to Hong Kong.

European deals account for more than 10 per cent of global yuan debt issues every year and have so far been mostly conducted in Hong Kong.

The 2.5 billion yuan (HK$3.18 billion) bond issue by the largest Chinese bank by assets in Britain - the first by a European branch of a Chinese bank - represents Beijing's latest efforts to internationalise the yuan and reaffirms London's ambition to corner a larger share of this market.

Many market watchers believe London is shaping up to mount a serious challenge to Hong Kong's status as the top destination for Western bond issuers, especially those in Europe as these companies would prefer the British capital for its time-zone advantage, strong regulatory framework and global foreign exchange volumes.

"Asian issuers who have got used to the Hong Kong system would still prefer this city for yuan bond issuance. But for some Western issuers, if London is built up as a mature RMB [renminbi] centre, they may consider it instead, given the convenience of the time zone," said Crystal Zhao, a Hong Kong-based fixed-income analyst at HSBC.

Europe has seen the second-biggest volume of yuan bond issues in the past three years, after North Asia. Nineteen European institutions issued a combined US$1.9 billion of yuan-denominated bonds last year, accounting for 13.3 per cent of the global total, according to Dealogic. That compares with 77.1 per cent issued in North Asia.