China Starts 6 Billion Yuan Bond Sale in Hong Kong

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Bloomberg China’s government started a sale of 6 billion yuan ($879 million) of bonds in Hong Kong, offering a higher coupon than available on the mainland to ensure the success of its first such issuance in the city. The Ministry of Finance plans to sell five-year bonds with 3.30 percent coupon, three-year securities at 2.70 percent and two-year debt at 2.25 percent, according to a press release by Bank of Communications Ltd. and Bank of China Ltd., the lead managers. Similar yields on the mainland market at the end of last week were 2.94, 2.31 and 1.82 respectively. “I believe the safer and more stable yuan bonds will be popular among Hong Kong investors,” Vice Finance Minister Li Yong said in a ceremony that started the sale. “I believe the yuan bond market will continue to develop and it will develop very quickly.” The government said this month that the debt sale is designed to help elevate the “international status” of the yuan, after Premier Wen Jiabao said in March that he is worried about the prospects for the dollar as a reserve currency. Speculation that the yuan will appreciate prompted deposits at the city’s banks to rise to 56 billion yuan at the end of July, the most this year. “There’s a local pool of yuan savings and the city’s people expect the yuan to appreciate, so it’s natural to have demand here,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong. “This is another case of China trying to increase its currency’s stature using Hong Kong as a launching pad.” ‘Cautious’ The result of the sale will be announced on Oct. 22 and the issue date is Oct. 27. “We were very cautious about pricing,” Li said. “We took into consideration all factors to decide the interest rates and the quantity of debt to sell. It will have very limited impact on the overall yuan bond market.” At least 2 billion yuan of two- and three-year notes will be sold to individual investors in denominations of 10,000 yuan, according to the ministry. The five-year debt will only be offered to institutional funds. Government debt may prove popular after the failure of Lehman Brothers Holdings Inc. a year ago led to losses on so- called minibonds that were backed by the U.S. bank, said Tse Kwok Leung, head of economic research at the Bank of China’s Hong Kong branch. The yields compared with the 0.8 percent interest on offer for one-year Hong Kong dollar deposits in the city. Bank of East Asia Ltd. and HSBC Holdings Plc’s China unit have sold yuan bonds in Hong Kong this year. Two-year notes issued by HSBC, Europe’s biggest bank, yielded 2.55 percent at the end of last week, according to data from the Treasury Markets Association. Yuan Outlook The People’s Bank of China in July approved a trial program for the currency to be used to settle cross-border trade with Hong Kong. Today’s ceremony comes three days before the 60th anniversary of China’s Communist Party rule. China’s growing economy, buoyed by record lending and a 4 trillion yuan stimulus plan, is spurring bets that policy makers will allow currency appreciation after the exchange rate was kept at about 6.83 since July 2008 to help exporters weather a recession. The currency jumped 21 percent in the previous three years following the end of a dollar peg. The yuan’s outlook depends on the economy’s performance and global exchange rates, Li said. He said that China’s economy is heading in a “positive direction” because of the stimulus spending and that the government will continue to give Hong Kong preferential treatment. Twelve-month non-deliverable yuan forwards trade at 6.735per dollar, stronger than the spot rate of 6.8282, according to data compiled by Bloomberg. Hong Kong’s dollar is pegged to the greenback, which has weakened against all of the world’s 16 most-traded currencies this year. To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.netWendy Leung in Hong Kong at wleung12@bloomberg.net This e-mail address is being protected from spambots. You need JavaScript enabled to view it