September 18, 2014 / 5:01 AM / 3 years ago

CNH Tracker-British bond plan boosts global role of China's yuan

HONG KONG, Sept 18 (Reuters) - China's ambitious drive to make the yuan a global currency got a boost from Britain's recent announcement it plans to issue an offshore yuan bond and keep the proceeds as its foreign-exchange reserve.

The move - the first by a Western country - also suggests the "redback" is moving toward the final and the most difficult stage on its journey to becoming an international currency, going beyond use for trade settlement and investment.

Since 2009, when Beijing began letting importers and exporters settle cross-border trade in its own currency, much progress has been made. Earlier this year, the percentage of China's total trade settled in yuan reached nearly 20 percent.

Meanwhile, foreign investors' appetite to hold yuan assets has increased, thanks to an expectation of yuan appreciation and attractive returns on these products. After appreciating for years, the yuan has weakened so far in 2014 though, shedding 1.5 percent against the dollar.

Demand for yuan products has been strong. Hong Kong's 270 billion yuan ($43.98 billion) quota for Renminbi Qualified Foreign Institutional Investors (RQFII), which enables investors in the city to enter the domestic market of the world's second-largest economy, has been exhausted, forcing some fund managers to stop accepting orders.

However, compared with the progress on yuan use for trade and investment, getting countries to include the Chinese currency in their forex reserves is still at a very early stage, especially for developed countries.

Prior to Britain's announcement, only a handful of countries from Asia, Africa and Middle East have publicly said that they started to switch part their reserves to yuan assets.

"The UK government intends to be the first national government outside of China to issue a bond in China's currency," British finance minister George Osborne said on Sept 12.

"We have issued bonds in U.S. dollars before. Now we will issue a bond in renminbi," said Osborne, adding the issuance was expected before the end of the year.

The UK is a pioneer in developing offshore yuan business in Europe. As one of the world's leading financial centres, it was the first G7 member to sign a bilateral currency swap with China and the first to win a RQFII quota.

London was granted a yuan clearing bank in March and is now competing with Frankfurt, Paris and Luxembourg to become the biggest yuan hub in European time zones.

Analysts believe Britain's endorsement of yuan internationalisation will strengthen European investors' confidence in the currency and help expand its footprint beyond Asia.

"The demand for renminbi is there, and what we need to do is more education." said Au King Lun, chief executive officer at Bank of China (Hong Kong) Asset Management. "We need to educate investors that renminbi is not about currency appreciation, but about strategic investment."

WEEK IN REVIEW:

* The Hong Kong Monetary Authority said on Monday it plans to launch a 10 billion yuan ($1.6 billion) intra-day repurchase facility to meet increasing demand for the Chinese currency when a landmark stock connect programme kicks off in October.

* Bank of China was appointed on Monday as a yuan clearing service in Paris and two French groups were awarded licences enabling them to invest in China's mainland securities, in moves to expand yuan markets.

* China's central bank said on Tuesday it had appointed Industrial and Commercial Bank of China, the country's largest bank, as the yuan clearing service bank in Luxembourg.

* IFC, a member of the World Bank Group, sold another dim sum bond in London. The 1 billion yuan bond made it the largest issuer of such bonds on the London Stock Exchange, with a total of 4.25 billion yuan to date.

* Sri Lanka's central bank and the People's Bank of China on Tuesday entered into a three-year currency swap to assist growing bilateral trade and investment, Sri Lanka's monetary authority said.

CHART OF THE WEEK:

Bilateral currency swap lines China's central bank signed with its foreign counterparts: link.reuters.com/fuf67v

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1 US dollar = 6.1388 Chinese yuan Editing by Richard Borsuk

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