State-owned China Development Bank Corporation (CDB) said Monday it is to issue 3 billion yuan of fixed-rate bonds to retail subscribers in Hong Kong. The offering will last from October 19 to November 5.

The denomination of the bond will be 10,000 yuan with a tenor of three years. The fixed rate bonds will bear a coupon interest of 2.7 percent per annum payable semi-annually.

CDB already issued 2 billion yuan-denominated floating rate bonds to institutional investors last week.

This is also the third time CDB has conducted a public offering of yuan-denominated fixed rate bonds in Hong Kong since China's central bank permitted mainland financial institutions to issue them in July 2007. CDB previously issued yuan-denominated bonds in the city in 2007 and 2009. In the latter issue of 3 billion yuan, 1 billion yuan was issued as a floating-rate bond.

The joint lead managers for the bond issuance were Bank of China (Hong Kong), the HSBC and Standard Chartered Bank (Hong Kong).

CDB Executive Vice President Gao Jian said that CDB's bond issuance will both satisfy market demand and further strengthen the role of Hong Kong as a yuan offshore center.

As it was the second time that CDB has conducted an offering of floating rate yuan-denominated notes in the city, Gao said that it will enhance the pricing mechanism and product choices of yuan-denominated bonds in Hong Kong.

Standard Chartered Bank (Hong Kong) issued a statement that said the issuance of floating rate yuan-denominated bonds will help establish the formation of yield curves, another factor in developing a price mechanism.

Concerning the investment potential of bonds, Harris Fraser investment research director Andy Lam said that they are relatively more attractive than the yuan-denominated insurance products as the yield return is higher and the holding period of the bonds is relatively shorter.

"Yuan bond investment can yield more stable returns while the appreciation trend of the yuan currency is predictable, so these two combined features can minimize the investment risks for retail investors," Lam said.

"However, the secondary market for yuan-denominated bonds is not well developed, so the illiquidity of the yuan-denominated bond market means that when retail investors cannot hold these bonds to maturity, they have to suffer a larger bid-ask spread than when they try to sell those bonds in the secondary market," Lam added.

Lam said that more yuan-denominated financial products, such as mutual funds and stock trading may also appear in the city in the future so retail investors should not make a heavy bet on yuan-denominated bonds alone.

China Daily

(HK Edition 10/19/2010 page2)