HONG KONG: HSBC became the first foreign bank to sell yuan-denominated bonds, raising funds for its mainland operations at a time when China is trying to increase acceptance of its currency in the region.

HSBC priced a 1 billion yuan ($146 million), two-year floating rate note at a spread of 38 basis points over the three-month Shanghai interbank offered rate (SHIBOR) yesterday.

China has gradually begun using its economic prowess to create a larger role for the yuan with moves such as allowing foreign lenders to sell yuan-denominated bonds and permitting settlement of trade in the currency.

Last month, HSBC and Bank of East Asia became the first foreign lenders to win approval to issue yuan-denominated bonds in Hong Kong.

Foreign banks, who have a limited network on the mainland, have a narrow funding base and the HSBC issue is likely to provide a benchmark for other foreign borrowers expanding their yuan-financing.

"Foreign banks are eager to raise yuan funding as they relay on the interbank market for yuan funding as their yuan deposits are not strong enough to support their operation growth in China," said Daniel Chan, a senior investment strategist at DBS Bank.

"But how much they can issue depends on the approval of the Chinese government."

The issue, made via HSBC's China arm, was targeted at institutional investors and is the first foreign entity among the growing borrowers eying Hong Kong's 53 billion yuan deposit.

Five mainland banks, including Bank of China and Bank of Communications, have issued a total of 22 billion yuan worth of yuan bonds in Hong Kong since 2007.

"While HSBC China is extremely liquid and strongly capitalized, through this bond issue we seek to support the development of Hong Kong's renminbi market and to help establish a representative pricing benchmark," said Vincent Cheng, chairman of HSBC Bank (China) Company Limited.

HSBC was the sole bookrunner for the transaction.

China, the world's largest holder of foreign exchange reserves, has expressed unease about the volatility of the US dollar and called for discussions on ways to create rival reserve currencies, while expanding the yuan's role.

Earlier this year, China signed a deal with Malaysia that will give exporters and importers in their nations the option of settling their trade deals in ringgit and yuan.

Reuters

(HK Edition 06/26/2009 page3)