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People's Daily Online>>China Business

News Analysis: One step closer to a global yuan

(Xinhua)

10:06, April 22, 2012

BEIJING, April 21 (Xinhua) -- As China accelerates bold steps to live up to its ambition of a global yuan, London's emergence as a leading Western hub for off-shore yuan trading is likely to add impetus to the Chinese currency's global status.

Market observers and economists say that HSBC's issuance of the first international renminbi-denominated bond in London has signaled an important stage for the Chinese currency's journey of "going global," but they also noted that the steps should be taken prudently and gradually.

Banking giant HSBC announced last week that it plans to sell 2 billion yuan (about 317 million U.S. dollars) of yuan-denominated bonds in London with a yield of 3 percent, the first-ever international yuan-denominated bonds to be sold outside China's sovereign territories.

The move came along with British Chancellor of the Exchequer George Osborne speaking of the country's ambition to boost London as an off-shore trading center for the Chinese currency.

"As the world's leading financial center, London is uniquely well placed to assist China in its goal of further expanding the international use of the RMB," Osborne has said.

London already represents 26 percent of the global offshore RMB spot forex market, with the majority being based in Hong Kong, Osborne said.

By the end of last year, the volume of RMB deposits in London had reached 109 billion yuan (17.3 billion U.S. dollars), according to a report from the City of London Corporation.

"The formation of an overseas yuan-denominated bond market and its diversification is a concrete step and important direction of the yuan's internalization," said Zong Liang, deputy general manager of the strategic development department of the Bank of China.

The move will also facilitate the use of yuan in cross-border trading and investment, thus boost trade between China and Britain, Zong said.

Actually, strong market demand for the HSBC renminbi bond has prompted the bank to double the size of the issuance from the initial one billion yuan.

Spencer Lake, co-head of Global Markets at HSBC, said in a statement, "We are confident this will open the market to other European and non-European issuers looking to fund themselves internationally in renminbi and help contribute to this rapidly developing market."

Currently, offshore RMB bonds are issued in Hong Kong, an off-shore yuan market where yuan deposits have accounted for 10 percent of all Hong Kong bank deposits and more than 80 institutions issued 106 billion yuan of renminbi bonds in 2011, over three times more than the 2010 level.

But according to Osborne, London is not in competition with Hong Kong. "It is a complement -- providing a Western hub for RMB business," he said.

Ba Shusong, an economist with the Development Research Center under the State Council, or China's Cabinet, attached much importance to the development of an off-shore yuan market, which he said should be promoted simultaneously with the opening of the on-shore market.

There will be a demand of investment backflow to the domestic market, or a smooth channel for the two-way cross-border flow of yuan, when the amount of yuan reaches certain level in the overseas market, said Ba.

Based on the development of cross-border trading of yuan, the country would then gradually make the currency convertible under the capital account, he said.

However, Ba also pointed out that the progress should be promoted step by step and in line with the progress of financial reform, as well as keeping a balance with the baseline of the country's financial security.

The internationalization of yuan should be based on a fully convertible yuan, but making yuan fully convertible under the capital account should not be promoted radically, said Zhang Xiaoji, a senior researcher at the Development Research Center of the State Council.

Fang Fang, vice chairman of JP Morgan's Asia Investment Banking division, said the construction of an off-shore yuan market is a good prelude and experiment in making yuan fully convertible.

But Zhang said the yuan will only be fully convertible when China has a mature financial market and long-term economic stability, as well as a management system that is recognized by international communities.

The yuan is still far from truly internationalized, he warned.

Furthermore, the internalization of a currency would be more of a market selection, which reflects a country's national strength and economic power, said Ma Jing, an official with the central bank.

To boost its global status, China should also work to boost the quality of the yuan and keep its value at a stable level, which would be a long-term task and require a more balanced international balance of payment and further domestic reforms, said economists.

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