An HSBC Plc employee displays bundles of 100 yuan bank notes at the bank's branch in Shanghai earlier this year. Hong Kong will see more yuan-denominated financial products go on sale in the city after the Securities and Futures Commission approved the first RMB fund Friday. Qilai Shen / Bloomberg

The $50 million sale will fund an energy-efficiency project on the mainland

International Finance Corp (IFC) and Asian Development Bank (ADB) are likely to become the first foreign institutions to issue yuan-denominated bonds in Hong Kong, marking a breakthrough in the city's efforts to develop as an offshore center for yuan products.

IFC, the private investment arm of the World Bank, plans to sell the equivalent of $50 million in yuan-denominated notes and use the proceeds to finance an energy-efficiency project on the mainland, its treasurer said Friday.

"We regard any yuan bond as part of market development and beneficial to our clients for access to local currency," said IFC treasurer Nina Shapiro, adding that the notes which would be the first in a series of deals have a maturity of three to five years. IFC will wait for approval from the Central Government to set the timing of the issue.

ADB declined to reveal any details on its own issue. Sources with knowledge of the matter said the bank had drawn up plans to sell yuan bonds offshore.

"We will naturally be interested in any opportunity to issue yuan bonds in Hong Kong subject to the necessary regulatory approvals," said ADB's head of local currency capital markets Monish Mahurkar.

Donna Kwok, an economist with HSBC told China Daily that the launch of yuan-denominated bonds by foreign institutions will mark a "stamp of approval" for Hong Kong's brand new yuan products platform.

"It could almost be considered the first maiden flight off Hong Kong's yuan products runway," said Kwok. "It wasn't possible to do so before but now it is - after the effective launch of Hong Kong's new yuan-interbank market last month."

The city's yuan-denominated bond market has seen only 14 issuances since it was initially created in 2007, mostly by mainland banks.

The pace at which the local yuan bond market develops could accelerate since the People's Bank of China and the Hong Kong Monetary Authority signed an agreement last month to remove restrictions on intra-bank yuan transfers, a move that has opened the door for the introduction of more yuan-denominated products in the city.

Kwok believes the move could also help speed up the emergence of a benchmark interest rate for yuan funds in Hong Kong's nascent yuan-product market and establish benchmark practices for other institutions.

Billy Mak, associate professor of Finance and Decision Sciences at Hong Kong Baptist University agrees with Kwok's views. He said the first yuan-bond issuance by an international institution in the city will "pave the way for other institutions to follow suit".

"Other multilateral institutions like the International Monetary Fund will likely follow the step to make a fortune in the city. Hong Kong's role as an offshore center for yuan products will be further strengthened after a successful precedent," said Mak.

Mak believes the internationalization of the yuan could also be boosted after its acceptance by global players in Hong Kong, particularly international financial institutions which usually prefer to hold US dollars and euros.

"It could be a breakthrough for both the yuan's influence in the international arena and Hong Kong's long-aspired status as an offshore yuan hub," Mak added.

IFC and ADB were also the first foreign institutions to issue yuan-demoninated bonds - dubbed "panda bonds" - on the mainland. The two issued more than $260 million worth of yuan bonds between them in 2005. ADB issued another 1 billion yuan worth of "panda bonds" on the mainland last December.

China Daily

(HK Edition 08/07/2010 page2)