November 7, 2018 / 5:01 AM / 8 days ago

UPDATE 2-China c.bank sells first yuan bills in HK as currency pressures build

* 3-mth bills 3.26 times oversubscribed, 1-yr bills 2.29 times oversubscribed

* Coupons higher than expected, but immediate impact unlikely given small deal size, say analysts

* Offshore yuan loses 6 pct against the dollar so far this year (Updates with analyst comments)

SHANGHAI/HONG KONG, Nov 7 (Reuters) - The People’s Bank of China sold its first yuan-denominated bills in Hong Kong on Wednesday, raising 20 billion yuan ($2.89 billion) and giving it a new tool to manage the currency in offshore markets as it faces further pressure.

A 10 billion yuan three-month tranche was priced at a coupon of 3.79 percent, while a one-year tranche, also worth 10 billion yuan, came in with a coupon of 4.20 percent, the PBOC said in a statement.

The two notes were oversubscribed by 3.26 and 2.29 times, respectively, the Hong Kong Monetary Authority said in a separate statement.

But investors’ appetite was no match for that seen in the PBOC’s first offshore yuan paper issued in London in 2015, which was six times oversubscribed.

The coupons also came in higher than analysts expected.

“The result suggests that investors may require a higher premium to hold onto the bills given the uncertain renminbi outlook when CNH liquidity is not particularly loose,” said Frances Cheung, head of macro strategy, Asia, at Westpac in Singapore.

But for the PBOC, the issuance is not about securing low cost funding, said Linan Liu, a Hong Kong-based strategist at Deutsche Bank. In fact, the goal may be the opposite.

“The central bank always has a choice to reduce the size of an auction if it doesn’t find the price attractive,” she said.

“Higher coupons can help influence liquidity and discourage speculation on the renminbi. It will also help investors keep RMB assets, rather than move to Hong Kong dollar or U.S. dollar assets.”

Should the PBOC issue these bills regularly, commercial banks could face rising costs when selling yuan-denominated certificates of deposit in the offshore market, Liu added. But the impact is expected to limited in the short run given that the size of the latest issue was only 20 billion yuan.

Hong Kong, the largest offshore renminbi centre, is home to 600.3 billion yuan of deposits as of end-September. bit.ly/2RGbqYP

The PBOC fixed the date for the sale last week, as the yuan came under pressure and drew closer to the 7 per U.S. dollar psychological level.

The offshore yuan has lost about 6 percent against the dollar so far this year as the greenback strengthened, the Chinese economy weakened and trade tensions between Beijing and Washington escalated.

Bank of Communications is the issuing and lodging agent for this deal, which will settle on Friday, Nov. 9.

$1 = 6.9303 Chinese yuan Reporting by Andrew Galbraith in Shanghai and Noah Sin in Hong Kong; Editing by Kim Coghill

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