Yuan liquidity in Hong Kong could find another channel through foreign direct investment (FDI), a People's Bank of China (PBoC) official said Tuesday at the Asia Financial Forum being held in the city.

"Personally I see demand for a FDI scheme from both the point of view of yuan internationalization and China's need to balance its payments in international trade. This will facilitate the launch of a FDI policy in the near future," said Zhang Jianjun, president of the PBoC's Shenzhen Central Sub-branch.

"We are actively studying the foreign direct investment plan," said Zhang, adding that the State Council has been consulted on the matter. However, he noted that no timetable has been set for the formal launch of the scheme.

He also revealed that there had been some twenty pilot cases of yuan FDI being conducted on the mainland, including a few in Shenzhen.

Meanwhile, Norman Chan, chief executive of the Hong Kong Monetary Authority (HKMA), said that the issue of moving yuan raised overseas back to the mainland and seeking higher returns has been a longstanding concern for companies.

If the FDI scheme for overseas yuan is finally approved and implemented, "it will extend the use of yuan raised in Hong Kong," said Chan. He indicated at the forum that yuan deposits in the city may have reached 300 billion yuan at the end of December, up from 279.6 billion yuan in November.

"Options for getting better returns for the yuan in Hong Kong are only increasing slowly. Regarded as an investment alternative, the yuan bond market had its first offering in early 2007, but it also exemplifies the low return problem," said Eric Tong of accounting firm Deloitte. "Accordingly, the Hong Kong bond market is consistently lower in interest rates than the mainland market by an average of 57 basis points."

The PBoC announced its very first policy for 2011 last week, which helps the Chinese currency to "go out" through overseas direct investment (ODI) in a move seen as part of the nation's efforts to boost the internationalization of the yuan.

For the yuan to go global, the PBoC's Zhang said there must be a "recycling process" for the currency so that it can flow in and out of the country. One-way moves cannot work and only succeed in showing the immaturity of the market, according to Zhang.

Currently there are no specific laws or rules regarding the remittances of offshore yuan, with prior instances being done on a case-by-case basis.

According to an HSBC report on offshore yuan bonds, generally there are two types of remittances. One is shareholder loans between the offshore issuer and its onshore operating entity, subject to approval by the PBoC and the State Administration of Foreign Exchange (SAFE). This type of approval enables not only initial proceeds remittance to onshore upon issuance, but also the remittance from onshore to offshore for interest and principal payments at future dates. This has been the preferred method for non-financial institution issuers.

The other is through an equity injection to an onshore entity, which requires approve from the PBoC, the SAFE, and the Ministry of Commerce. This type only allows the remittance of bond proceeds onshore. So far only Hopewell Highway Infrastructure's proceeds from its yuan-denominated bond sale in Hong Kong have been remitted this way, according to HSBC.

China Daily

(HK Edition 01/19/2011 page2)