UPDATE 1-China to issue sovereign yuan bonds in Hong Kong

Tue Sep 8, 2009 12:32am EDT

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(Updates to add details, background, analyst reaction)

* China says yuan bond issue to be benchmark for more in HK

* Analysts see it as crucial to creating offshore yuan market

By Zhou Xin and Simon Rabinovitch

BEIJING, Sept 8 (Reuters) - China's finance ministry will issue 6 billion yuan ($878 million) in yuan-denominated bonds in Hong Kong, its first such issue and a key step in the gradual internationalisation of the Chinese currency.

The finance ministry said in a statement on its website on Tuesday that the bond issue, scheduled for Sept 28, would provide a pricing benchmark for other yuan bonds issued in Hong Kong, encouraging Chinese firms to raise funds in the territory's debt market.

Beijing's first-ever sovereign issuance in Hong Kong is a drop in the ocean compared to its planned 950 billion yuan ($139 billion) of treasury bonds this year, but it is significant for other reasons.

"The issuance marks a very important step in internationalising the yuan by establishing a benchmark yield curve in Hong Kong to create an offshore yuan market for pricing yuan interest rates," said Shi Lei, an analyst at Bank of China in Beijing.

The move is also crucial to China's slow and carefully managed transformation of the yuan, also known as the renminbi, into a currency widely used beyond its borders.

China has made little secret of its plan to make Hong Kong the main offshore centre for yuan trading. Premier Wen Jiabao said in April that the finance ministry would consider issuing bonds there to spur the development of the yuan debt market.

"The government's Hong Kong yuan bond issue is the latest sign of its intention to internationalise the yuan," said Haitong Securities chief economist Chen Lu in Shanghai.

"But the move to make the yuan into a regional currency and then an international currency will take a long time, years at least."

Five state-owned Chinese banks, including Bank of China and China Construction Bank, have issued yuan bonds in Hong Kong since 2007, when the government began allowing such deals.

Earlier this year, HSBC became the first foreign bank to issue yuan bonds in Hong Kong.

China has also launched a pilot programme, centred on Hong Kong, for companies to settle trade in yuan. The largest of China's bilateral currency swaps introduced over the past year was its 200 billion yuan agreement with Hong Kong.

"They have always encouraged issuance of yuan bonds here in Hong Kong. It also signifies government support for Hong Kong as the offshore renminbi centre," Zhi Ming Zhang, an HSBC analyst in Hong Kong.

The Standard, an English-language newspaper in Hong Kong, reported earlier on Tuesday that China's Ministry of Finance was planning to issue yuan-denominated bonds in Hong Kong to raise as much as 100 billion yuan ($14.64 billion).

The Standard said Bank of China (Hong Kong) (2388.HK) had been designated as the clearing bank. ($1=6.827 Yuan)

(Additional reporting by Umesh Desai in Hong Kong, Karen Yeung and Lu Jianxin in Shanghai; Editing by Ken Wills)

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