RMB bonds for $1.24b on auction in HK

This year's first batch of sovereigns part of planned total issuance for 20b yuan

China's Ministry of Finance will issue 8 billion yuan ($1.24 billion) worth of renminbi-denominated sovereign bonds in Hong Kong's offshore market, and the primary auction will start on Thursday morning, the ministry said on Wednesday.

This marks the year's first batch of RMB sovereign bonds the central government will issue in Hong Kong. The Ministry of Finance plans to issue RMB sovereign bonds totaling 20 billion yuan this year.

For the first time in three years, the central government will issue 10-year RMB sovereign bonds for 1 billion yuan. The newly issued two-year bonds will be for 5 billion yuan, and the five-year new bonds will be for 2 billion yuan, the ministry disclosed.

Since the beginning of this year, the scale of RMB-denominated deposits in Hong Kong has increased steadily. As 21.4 billion yuan of RMB sovereign bonds will mature this year, the 20 billion yuan issuance, which is up by 5 billion yuan from last year, will satisfy the market's demand. This should help boost Hong Kong's status as an international financial center, said the ministry.

Analysts said China has optimized policies and procedures for the issuance of RMB-denominated sovereign bonds in offshore markets in recent years.

For instance, the central government encouraged the Hong Kong Special Administrative Region government to clarify that institutional investors are exempt from tax on profits. It also included the RMB-denominated treasury bonds in the scope of high-quality liquid assets, which has strongly supported the bond issuance and circulation, analysts said.

The central government started selling RMB-denominated sovereign bonds in Hong Kong in September 2009. By the end of August this year, the central government had issued RMB-denominated sovereign bonds totaling 218 billion yuan in Hong Kong, ministry data showed.

Besides, such bonds have been issued in London for 3 billion yuan and in Macao for 2 billion yuan. The total outstanding amount of the RMB-denominated sovereign bonds in offshore markets reached 50.1 billion yuan by August, data indicated.

A Standard Chartered Bank research report published on Aug 26 said this year's auctions of RMB-denominated sovereign bonds in the offshore markets are likely to be well received by global investors, thanks to the solid outlook for the Chinese yuan, supply scarcity, low yields on US treasuries, and the likelihood of a more proactive economic policy in China in the second half.

Some global institutional participants told China Daily on Wednesday that they "expected so much" from the first batch of issuance, as the move will offer more high-liquidity and qualified RMB-denominated assets, which are attractive because of the relatively higher yields.

In addition, the FTSE World Government Bond Index, or the WGBI, will include China's treasury bonds at the end of October, which will further persuade global investors to invest in RMB-denominated sovereign bonds and improve liquidity in the secondary market, sources at major financial institutions said.

Investors, they said, expect the launch of the South Connect of China's Bond Connect program will expand investors' scope in Hong Kong's RMB-denominated bond market and increase the liquidity of overseas RMB-denominated bonds and the trading volume of the secondary market.

The South Connect program is expected to lead to a material rise in Chinese entities' participation in the international bond market in the years ahead－not only as investors but as issuers, said Becky Liu, head of China Macro Strategy at Standard Chartered Bank.