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September 29, 2009

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Sovereign yuan bonds are put on sale in HK

CHINA began its first offshore sale of yuan-denominated sovereign bonds yesterday in a Hong Kong offering aimed at lifting the international profile of its currency. The debt carries a higher coupon than domestic bonds.

The Ministry of Finance is taking subscriptions for 6 billion yuan (US$878 million) of bonds in maturities of two, three and five years. The sale to retail and institutional investors ends on October 20, and the results will be announced two days later.

The two-year debt has a coupon of 2.25 percent, while three-year securities are offering 2.70 percent. The five-year bonds, open only to institutional investors, have a coupon of 3.30 percent.

The rates are up to 43 basis points higher than government bonds sold only on the mainland.

"I think the bonds will be very popular among investors in Hong Kong," said Gilbert Tse, Societe Generale's head of global markets, China. "Oversubscription is very likely."

The offer is aimed at increasing acceptance of the yuan overseas. China is aiming to transform the currency into a regional, then a global channel of trade and finance. The sale also will give China a sovereign debt rating and establish a benchmark for future bond sales.

"The yuan will become one of the major currencies in the region or even in the world," said Henry Tang, chief administrative secretary for Hong Kong.

He said the issuance of yuan sovereign bonds will enhance that process.

China has already ventured offshore to drum up support for the yuan.

In early September, the nation agreed to buy up to US$50 billion worth of International Monetary Fund bonds and paid for the purchase in yuan. The IMF will lend the yuan to member countries, a step aimed at increasing the yuan's acceptance.

The currency is growing popular among China's trading partners, especially in Asia.

The People's Bank of China has signed six currency swap deals valued at 650 billion yuan with Hong Kong, Indonesia, South Korea, Malaysia, Belarus and Argentina.

Hong Kong provides a key platform for the central government to promote the yuan.

Li Yong, China's deputy finance minister, said yesterday that the bond issue underscores the mainland's determination to include Hong Kong in its growth strategy.

In 2007, China Development Bank became the first state-owned lender to sell yuan bonds in Hong Kong, testing the offshore appetite for the currency.

Stephen Green, Standard Chartered's head of research in China, said a market for the local currency will develop as more banks are allowed to settle in yuan and more yuan bonds are issued.

"The ministry is dipping its toe into a small offshore pool of the yuan," said Green.

"A liquid offshore yuan bond market is one of the prerequisites for the local currency's regionalization, as long as capital-account controls prevent offshore holders of yuan from investing in onshore bonds," he said.


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