China Bond-Market Opening to Spur Yuan, Citigroup, Credit Agricole Predict
Aug. 18 (Bloomberg) -- Hon Cheung, State Street Global Advisors' regional director for official institutions group in Asia, talks about investing in Asian fixed income. Cheung speaks in Hong Kong with Bloomberg's Rishaad Samalat. (Source: Bloomberg)
China’s opening of its bond market to foreign banks holding yuan will boost global demand for the currency and enhance its potential as a foreign-exchange reserve asset, Citigroup Inc. and Credit Agricole CIB said.
The People’s Bank of China said yesterday it will let overseas financial institutions invest yuan holdings in the interbank bond market, while keeping limits on the conversion of foreign currency for such investments. The program will start with central banks and clearing banks for cross-border yuan settlement, according to a statement on its website.
“Overseas investors will be more willing to hold renminbi assets, especially when risk appetite remains low due to the economic slowdown globally,” analysts at New York-based Citigroup including Minggao Shen wrote in a report. The measure was a “natural next step in currency internationalization” after China expanded the use of yuan in global trade, he said.
The popularity of a program for using the yuan to settle goods and services transactions, started in June 2009, has been limited because of the lack of investments available to recipients in the currency, also known as the renminbi. China, seeking to reduce reliance on the U.S. dollar, reduced its holdings of Treasuries by 6 percent in the first half to $843.7 billion, Department of Treasury data released this week show.
‘Big Bang’
China’s interbank market had a total 14.3 trillion yuan ($2.1 trillion) of bonds outstanding as of June 30, including debt issued by the central government, banks and companies, the central bank said July 30. That accounted for 97 percent of total debt outstanding.
The decision can be seen as the beginning of a “big bang” of wider reforms allowing increased access to China’s capital markets for foreign investors, Nomura Holdings Inc. analysts led by Sean Darby wrote in a report today. That includes a proposal for holders of yuan to win quotas to invest in the nation’s local-currency A shares, they wrote.
“The changes in China’s capital account are occurring alongside reforms to the mainland financial markets, particularly the mainland A-share markets,” the report said.
‘Further Momentum’
The announcement “is significant as it moves renminbi dealings beyond trade-related transactions only,” said Mark McCombe, chief executive officer for Hong Kong at HSBC Holdings Plc. “We therefore believe renminbi liberalization will gain further momentum, spurred on by the greater interest from overseas parties attracted to this much larger market.
The yuan was little changed at 6.7915 per dollar in Shanghai and twelve-month non-deliverable forwards for the currency were at 6.6815, reflecting bets it will advance 1.6 percent, according to data compiled by Bloomberg. While trading in yuan outside of Hong Kong is still limited, there is a possibility the currency will trade at a stronger rate than in the onshore market, said Gerrard Katz, head of foreign-exchange trading at Standard Chartered Plc. in Hong Kong.
‘‘I don’t think there’s going to be big changes to the offshore exchange rate initially,” Katz said. “But when the actual amount of yuan deposits gets bigger, we could see the yuan exchange rate going higher.”
Yuan Deposits
Yuan deposits in Hong Kong climbed 4.8 percent in June to a record 89.7 billion yuan. China agreed to a three-year currency swap with Singapore valued at 150 billion yuan in July to facilitate trade between the two nations and has signed at least 650 billion yuan of swap agreements with Argentina, Indonesia, Belarus, Malaysia, Hong Kong and South Korea since December 2008.
Trade settlement using the yuan more than doubled to 48.7 billion yuan in the second quarter from the previous three months, bringing the total amount in the past year to 70.6 billion yuan, the central bank said on Aug. 5.
“Foreign central banks may decide to begin the process of diversifying their reserves into Chinese yuan,” said Dariusz Kowalczyk, a currency strategist at Credit Agricole in Hong Kong.
Monish Mahurkar, head of local-currency capital markets at the Asian Development Bank in Manila, said that would be a gradual process.
“It allows the central banks in Asia with larger reserves to start including renminbi as part of their currency allocation,” he said. “The policy makers in China are clearly starting to position the renminbi as an international currency.”
Overseas banks must apply for investment quotas on the interbank market and open special trading accounts at local lenders, the central bank said. They should disclose funding sources and investing plans in their applications, it said.
--Belinda Cao, Henry Sanderson, Andrea Wong. Editors: Sandy Hendry, Andrew Janes
To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net
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