Rise of the RMB

Bond, Renminbi Bond

Offshore sovereign bonds set to be issued in local currency for the first time

Zhou: taking on the US dollar

In late March, Zhou Xiaochuan – the head of China’s central bank – made his first call for a new “super-sovereign reserve currency” to reduce reliance on the dollar.

The goal, he wrote, was to “create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.”

But are the Chinese now getting more serious about pushing their own currency as an alternative to an increasingly skittish dollar?

Seems like it. Early this month, Beijing announced the launch of its first-ever offshore sovereign bond in Hong Kong.

While domestic banks like Bank of China and China Construction Bank, have issued renminbi-denominated bonds in Hong Kong since 2007, this is the first time that government bonds (comparable to US Treasury securities) are to be marketed.

China plans to issue a total of Rmb6 billion ($879 million) of bonds in Hong Kong on September 28. This is a move to promote the yuan in neighbouring countries and improve the international status of the currency, says the country’s finance ministry. Analysts believe it will also help mainland groups to raise funds in the offshore yuan bond market.

“While the overall issuance size is relatively small, this marks another important step towards the internationalisation of the renminbi,” says Janus Chan, an economist at HSBC.

Developing an offshore bond market will be a critical step if the renminbi is to become a global currency, as bonds will offer foreign institutions an attractive means to hold the renminbi.

Earlier this month, China also agreed to use renminbi to buy up to $50 billion worth of the IMF’s first bond issue.

The IMF will then lend the Chinese currency to its member countries, in a step that should further promote the yuan as a future reserve currency.

Beijing has taken other steps in the past year to encourage greater use of the renminbi in international transactions (see WiC23).

Although the Ministry of Finance didn’t disclose the maturities or coupons of the bonds, analysts are forecasting a yield of around 2.45% to 2.6% on an assumption of a two-year maturity.

Not bad, considering the yield on a two-year US Treasury was at 0.94% as of Wednesday this week.

As America’s largest creditor, China has accumulated over $2 trillion in foreign reserves, mostly in Treasury bonds and other dollar-denominated assets.

That exposure has made Beijing increasingly uneasy, especially as the Federal Reserve pumps hundreds of billions of dollars into the US economy. The dollar has slipped more than 12% against the yuan since early 2007.

Analysts believe the market will respond positively to China’s maiden issuance: “We expect the sovereign bond to be well-received as oversubscriptions have been recorded in the previous issues of non-sovereign bonds in Hong Kong,” says HSBC’s Chan in an investor note.

Vincent Ho, associate director of Asia Sovereign Ratings at Fitch Ratings, told the Wall Street Journal that a successful first issue could mean that the Chinese government will feel more comfortable exposing its currency further.

But when will the yuan be freely convertible? Predicting a timescale is difficult, although commentators agree that China will always err on the side of caution.

But one potential ‘hard stop’ in the process is the often-stated aim of building Shanghai into an international financial centre by 2020.

If that is really going to happen, China would need to have a freely traded currency by then. So ten years, and counting…


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