Yuan-denominated treasury bonds issued in Hong Kong will soon be traded at the region's stock exchange, according to a memorandum of understanding (MOU) signed by the Ministry of Finance and Hong Kong Exchanges and Clearing Ltd Friday.
The government bonds mentioned in the MOU will be issued in Hong Kong starting this Thursday and will be worth a total of 23 billion yuan ($3.61 billion), the largest issuance of its kind since 2009. The ministry also points out that 2 billion yuan in government debt has been earmarked for sale to foreign central banks, marking the first time that the Chinese mainland government has allowed these overseas institutions to invest in its treasury bonds.
These measures aim to lead the yuan to greater prominence among the world's major currencies by promoting the offshore treasury bond market in Hong Kong, boosting the yuan's liquidity between onshore and offshore markets, and making it easier for the renminbi to be held abroad as a foreign-exchange reserve, Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, told the Global Times.
Given China's foreign trade structure, it is far easier for the yuan to exit rather than enter the domestic market, said Zhou, who added that of the combined yuan amount used in trade financing, 80 percent was paid by the mainland to other countries for imports, while only 20 percent of these funds came from abroad.
Issuing yuan-backed government bonds in Hong Kong will facilitate yuan flows back into the onshore market and thus contribute to cross-border liquidity of the currency, Zhou noted.
Allowing foreign central banks to purchase yuan-denominated government bonds will also help raise the share of yuan-denominated assets in foreign currency reserves overseas, a crucial step in the currency's internationalization, Zhou said.
At present, several foreign central banks, mostly from Asian countries, have expressed an interest in subscribing to yuan-backed government bonds, according to the Hong Kong Monetary Authority.
These central banks intend to purchase yuan-denominated treasury bonds as they are among the few investment products denominated in the Chinese mainland currency available in the offshore market, said Zhou Hao, a global market analyst from ANZ China.
This year, the interest rates on government yuan bonds issued in Hong Kong are expected to rise, as cross-border arbitrage has lifted the yields on offshore yuan-backed treasury bonds by narrowing the gap between their returns in onshore and offshore markets, Zhou Hao said.
According to Zhou, the spread started to narrow last year and the trend will continue until yields in the two markets reach near-parity. Currently, the yield rate on 10-year government bonds offshore is 3.15 percent, 0.3 percent lower than in the onshore market, Zhou said.
A total of 15.5 billion yuan in government bonds, with maturities ranging from three to 15 years, will hit the auction block for institutional investors this Thursday, while retail investors can subscribe to 5.5 billion yuan in bonds with a two-year maturity. Last year, the coupon rates for five-year and 10-year government bonds issued in Hong Kong were 1.4 percent and 2.36 percent respectively.