China’s opening of its bond market to foreign banks holding yuan will further boost global demand for the currency and enhance its potential as a foreign-exchange reserve asset, Citigroup Inc. and Credit Agricole CIB said.
China’s central bank said yesterday it will let overseas financial institutions invest yuan holdings in the nation’s interbank bond market, while keeping limits on the conversion of foreign currency for such investments. The program will start with foreign central banks and clearing banks for cross-border yuan settlement, according to a statement on its website.
"Overseas investors will be more willing to hold renminbi assets, especially when risk appetite remains low due to the economic slowdown globally,” analysts at New York-based Citigroup including Minggao Shen wrote in a report. The measure was a “natural next step in currency internationalization” after China expanded the use of yuan in global trade, he said.
The popularity of a program for using the yuan to settle goods and services transactions, started in June 2009, has been limited because of the lack of investments available to recipients in the currency, also known as the renminbi. China, seeking to reduce reliance on the U.S. dollar, reduced its holdings of Treasuries by 6 percent in the first half to $843.7 billion, Department of Treasury data released this week show.
China’s interbank market had a total 14.3 trillion yuan ($2.1 trillion) of bonds outstanding as of June 30, including debt issued by the central government, banks and companies, the central bank said July 30. That accounted for 97 percent of total debt outstanding.
'Further Momentum’
The announcement “is significant as it moves renminbi dealings beyond trade related transactions only,” said Mark McCombe, chief executive officer for Hong Kong at HSBC Holdings Plc. “We therefore believe renminbi liberalization will gain further momentum, spurred on by the greater interest from overseas parties attracted to this much larger market.
Yuan deposits in Hong Kong climbed 4.8 percent in June to a record 89.7 billion yuan. China agreed to a three-year currency swap with Singapore valued at 150 billion yuan in July to facilitate trade between the two nations and has signed at least 650 billion yuan of swap agreements with Argentina, Indonesia, Belarus, Malaysia, Hong Kong and South Korea since December 2008.
"Foreign central banks may decide to begin the process of diversifying their reserves into Chinese yuan,” said Dariusz Kowalczyk, a currency strategist at Credit Agricole in Hong Kong.
The decision can be seen as the beginning of a “big bang” of wider reforms allowing increased access to foreign investors, Nomura Holdings Inc. analysts led by Sean Darby wrote in a report today. That includes a proposal for holders of yuan to win quotas to invest in the nation’s stock markets, they wrote.
Overseas banks must apply for investment quotas on the interbank market and open special trading accounts at local lenders, it said. They should disclose funding sources and investing plans in their applications, according to the central bank.
