China will let Hong Kong companies buy $3.1 billion of yuan-denominated securities and open a channel for Chinese investors to buy stocks in the city, to bolster the territory’s economy and promote use of the yuan.
China will expand its companies’ offshore bond sales and support the use of yuan for foreign direct investment in the nation, Vice Premier Li Keqiang said at a televised seminar in the city today. The nation will also offer investors an exchange-traded fund based on Hong Kong equities, he said.
Expanding the yuan trade aids an economy that shrank in the second quarter, echoing China’s assistance to Hong Kong after the deadly SARS epidemic of 2003, when a loosening of restrictions on tourist visas spurred spending. China is also boosting the currency’s international role to curb dependence on the dollar, which may weaken as the U.S. Federal Reserve pledges to keep interest rates at record lows through mid-2013.
“China wants the yuan to be one of the new currency anchors in the long-run, thus it will be less affected by the increasingly volatile and weaker U.S. dollar,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA. “Hong Kong will continue to be a test ground for China’s capital account opening-up and currency internationalization.”
The pledge for an exchange-traded fund comes after the government scrapped in January 2010 a plan to allow Chinese nationals to buy equities directly. The so-called “through-train” program for direct purchases, unveiled by regulators in August 2007, had helped push the Hang Seng Index to a record high in October that year.
Shares of Hong Kong-based financial services companies Haitong International Securities Group Ltd. (665), Guotai Junan International Holdings Ltd. (1788) and China Everbright Ltd. (165) jumped. Haitong rose 16 percent, the most in more than 19 months, to HK$4.19 as of 11:28 a.m. in Hong Kong. Guotai Junan climbed 12.6 percent, heading for its biggest one-day gain, to HK$2.95, while Everbright rose 9.2 percent, the most since Jan. 11, 2010, to HK$12.32.
Ivan Li, deputy head of Hong Kong research at Kim Eng Securities Hong Kong Ltd., said the gains related to the roles those firms may play under the investment quota.
“Its status as a financial center in Asia and globally is crucial for Hong Kong’s development,” Li Keqiang said. “The ETF constituted by Hong Kong-listed stocks will be launched.”
Qualified foreign institutional investors “will be allowed to invest in mainland securities markets with an initial size of 20 billion yuan ($3.1 billion),” Li said. “Pilot projects for foreign banks to replenish capital with renminbi will be launched and support will be given to Hong Kong enterprises in making direct investment on the mainland in renminbi.”
Hong Kong’s economy shrank 0.5 percent in the second quarter as export growth cooled. The city lost its place this year as the world’s biggest center for initial public offerings as the flow of multibillion-dollar sales by Chinese state-owned companies dried up. Hong Kong IPOs raised $15 billion this year, while the U.S. had $36 billion worth, according to data compiled by Bloomberg.
At the same time, the Chinese Ministry of Finance’s sale of 20 billion yuan of “dim sum bonds” starting today will be its third and largest issue of yuan-denominated debt in Hong Kong. In another sign of the currency’s growing importance, yuan deposits in Hong Kong totaled a record 554 billion yuan at the end of June, more than six times the level of a year earlier, according to the city’s de facto central bank.
Helping Hong Kong
“All these moves will help enhance Hong Kong as a leading financial center,” said Danny Yan, Hong Kong-based portfolio manager at Haitong International Asset Management, which oversees $600 million. “The impact on the Hong Kong market will be more long-term than short-term.”
Price differences for securities suggest investors using Hong Kong’s yuan QFII may look to invest in bonds rather than equities.
Yuan-denominated bonds in Hong Kong, known as dim sum debt, yield less than those on the mainland because offshore investors have fewer options to invest using China’s currency and seek to profit from appreciation. Chinese government notes maturing in December 2020 yield 2.48 percent in Hong Kong and 4.05 percent in Shanghai, according to data compiled by Bloomberg. The yuan will strengthen 5.6 percent to 6.05 per dollar by the end of next year, based on the median forecast in a Bloomberg survey.
All of the 70 companies that have stock listings in both China and Hong Kong trade at a premium on the mainland, according to data compiled by Bloomberg. Luoyang Glass Co. has the biggest gap in valuations, with its Shanghai price of 9.93 yuan more than five times the HK$2.29 commanded in Hong Kong.
To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at email@example.com