HONG KONG: The central government is launching a sale of 6 billion yuan ($879 million) worth of bonds in Hong Kong, offering a higher coupon than available on the mainland to ensure the success of its first such issuance in the city.

The Ministry of Finance plans to sell five-year bonds with 3.30 percent coupon, three-year securities at 2.70 percent and two-year debt at 2.25 percent, according to a press release by the Bank of Communications Ltd and Bank of China Ltd, the lead managers. Similar yields on the mainland market at the end of last week were 2.94, 2.31 and 1.82, respectively.

"I believe the safer and more stable yuan bonds will be popular among Hong Kong investors," Vice Finance Minister Li Yong said in a ceremony that started the sale. "I believe the yuan bond market will continue to develop and it will develop very quickly."

The government said this month that the debt sale is designed to help elevate the "international status" of the yuan, after Premier Wen Jiabao said in March that he is worried about the prospects for the dollar as a reserve currency. Speculation that the yuan will appreciate prompted deposits at the city's banks to rise to 56 billion yuan at the end of July, the most this year.

"There's a local pool of yuan savings and the city's people expect the yuan to appreciate; so it's natural to have demand here," said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd in Hong Kong.

The result of the sale will be announced on October 22, with the issue date set for October 27.

"We were very cautious about pricing," Li said. "We took into consideration all factors to decide the interest rates and the quantity of debt to sell. It will have very limited impact on the overall yuan bond market."

At least 2 billion yuan of two- and three-year notes will be sold to individual investors in denominations of 10,000 yuan, according to the ministry. The five-year debt will be offered only to institutional funds.

Government debt may prove popular after the failure of Lehman Brothers Holdings Inc a year ago led to losses on so-called minibonds that were backed by the US bank, said Tse Kwok Leung, head of economic research at the Bank of China's Hong Kong branch. The yields compared with the 0.8 percent interest on offer for one-year Hong Kong dollar deposits in the city.

Bank of East Asia Ltd and HSBC Holdings Plc's mainland unit have sold yuan bonds in Hong Kong this year. Two-year notes issued by HSBC, Europe's biggest bank, yielded 2.55 percent at the end of last week, according to data from the Treasury Markets Association.

The People's Bank of China in July approved a trial program for the currency to be used to settle cross-border trade with Hong Kong.

Bloomberg News

(HK Edition 09/29/2009 page4)