OREANDA-NEWS. August 23, 2011. Chinese Ministry of Finance (MOF) announced its third and largest renminbi (RMB) denominated treasury bond issue in Hong Kong.
 
The amount totaling 20 billion yuan exceeded the aggregate of bond issuance in the past including 6 billion yuan and 8 billion yuan in 2009 and 2010 respectively.
 
Analysts expected the move to both diversify RMB investment options and boost the RMB bond market. In the long run, with Hong Kong's status of an offshore RMB center confirmed by the central government, it is of highly supportive significance.
 
MORE USE OF RMB
 
Although a growing number of yuan denominated investment tools were introduced since Hong Kong launched RMB business in 2004, market participants have been calling for more diversified options.
 
The biggest characteristic of treasury bond investment is stable income, higher safety factor, which is adored by the market, said Zhang Ying, senior economist with Bank of China (Hong Kong) Limited.
 
RMB deposits advanced at stunning speed in Hong Kong due to expectations of further appreciation of yuan and the boom in cross border trade settled in the currency.
 
According to Hong Kong Monetary Authority, the city's RMB deposit grew by 76 percent from 315 billion yuan at the beginning of the year to 550 billion yuan by the end of June, increasing at a monthly average of around 40 billion yuan.
 
The treasury bonds issue will increase investment tools for local investors, especially for banks who have large RMB funds, Zhang said.
 
BROADEN RMB BOND MARKET
 
Lian Ping, chief economist from Bank of Communications, said issuance of treasury bonds will enhance the breadth of local RMB bond market.
 
Considering the historic amount, the issuance will surely broaden Hong Kong's RMB bond market to a large extent, he said.
 
RMB sovereign bonds in 2010 and 2009 took up about 38 percent and 22 percent respectively of the total amount of RMB bonds issued in each year, Lian said, adding the latest round will be of great importance to the market.P China's offshore RMB bond market was initiated in Hong Kong in 2007. Since then, the development of RMB bond has been encouraging. However, just as its nickname given by the insiders in Hong Kong, it stayed at a small scale.
 
By the end of 2010, the outstanding amount of Hong Kong dollar-denominated bonds was 1,250 billion, while that of yuan-denominated bonds was 70 billion only.
 
Lian expected the amount of yuan deposit in Hong Kong to reach 2 trillion in 2013, which will provide greater development space and additional momentum to Hong Kong's RMB bond market.
 
By the end of 2013, the RMB bond outstanding in Hong Kong is likely to be around 250 billion yuan to 300 billion yuan, he said.

PROMOTE OFFSHORE RMB CENTER
 
Zhang said issuance of RMB sovereign bonds will promote a virtuous circle of the offshore center.
 
Right now, Hong Kong as the offshore RMB business center has started to take shape.
 
The amount of RMB deposits in local banking system continued to increase rapidly, of which the corporate deposits, the key driver of the growth in RMB deposits, took up as much as 71 percent at the end of June.
 
Meanwhile, RMB trade settlement amount conducted through Hong Kong banks reached 800 billion yuan in the first half of 2011, already more than doubling the 370 billion yuan recorded for the whole of last year.
 
More RMB products would attract a greater number of international companies to settle trade in yuan, which makes possible a rapid and healthy development of the offshore RMB business in Hong Kong, Zhang explained. (1 U.S. dollar equals 6.4 yuan).