The yields on offshore yuan bonds issued in Hong Kong may slip further due to growing demand for investment products dominated in the Chinese currency, a Standard Chartered executive said Tuesday.

The Asia-focused lender is also seeing strong interest from clients about use of the Chinese currency offshore, said Charles Feng, regional head of fixed income, currencies and commodities in Northeast Asia.

"The low rates have to do with both demand for the currency and Hong Kong's low interest rates," Feng said during a news conference. "However, if the US Fed raises rates and Hong Kong follows, this could help push yields up in the future."

The World Bank set a new low for offshore yuan bonds earlier this month when it set its coupon rate at 0.95 percent for a two-year issue.

Companies and institutions have been steadily queuing to issue yuan-denominated debt in Hong Kong. Borrowing costs are lower than in the mainland thanks to investors who are willing to accept low yields in return for exposure to a currency that is expected to appreciate.

Hong Kong has been the laboratory for Chinese experiments on liberalising its currency since rules to promote cross-border trade settlements were liberalised in July 2010, where offshore yuan is referred to by the acronym CNH.

Banks have all been steadily getting into the offshore yuan act. Citi said on Tuesday it had made enhancements to its WorldLink payment services system to cut the time taken to settle yuan trades to two days from over a week previously.

Separately, Swiss private bank Sarasin Tuesday also became the latest in a string of lenders to begin offering offshore yuan investment products such as certificates of deposits and bonds.

Reuters

(HK Edition 01/26/2011 page3)