By William Patalon III
Money Morning/Money Map Report
Mainland China is continuing its push to transform the yuan into a globally accepted currency.
In May, China's central government said it would permit locally incorporated foreign lenders to issue yuan bonds on the mainland. Now HSBC Holdings PLC (NYSE ADR: HBC) and Standard Chartered Bank are preparing to issue more than $500 million in yuan-denominated bonds – which would make them the first foreign banks to make such a move on the mainland.
[However, China did last month rule that HSBC and the Bank of East Asia Ltd. (OTC ADR: BKEAY) could issue yuan-denominated bonds in Hong Kong.]
The yuan is known officially as the renminbi – which translates as "people's money" or "people's currency" – and is often referred to in financial circles as the "RMB."
China is employing three key strategies as part of a financial makeover that's intended to transform it into a global economic superpower. Those strategies consist of:
- A push to make the yuan into a true international currency.
- A plan to develop the East Coast city of Shanghai into a global financial center over the next decade.
- And an initiative to enable publicly traded foreign firms to sell stock to China's investors.
"By engaging in local RMB bond issuance, we hope to assist in elevating the RMB's status as an international reserve currency," Standard Chartered Group Chief Executive Officer Peter A. Sands said in a statement.
Money Morning Investment Director Keith Fitz-Gerald says this strategy could accelerate China's evolution into a global economic superpower.
"I've [long said] that the day would come when [Chinese] companies were able to raise enough investment capital at home to finance their forays abroad, Fitz-Gerald wrote last week. "The day that occurred, I've said, is the day when the real fireworks would begin. Beijing [has] finally lit the fuse. By announcing the launch of a new market for dollar-denominated bonds that are issued by non-financial firms, China has now taken a major step toward modernizing its capital markets."
Standard Chartered announced plans to raise as much as $512.5 million (3.5 billion yuan) by selling bonds in China's so-called "interbank market" – a top-tier foreign-exchange market that enables a bank to trade one currency for another.
HSBC only announced its intent to sell the yuan-denominated bonds – but provided no dollar figure. Neither bank talked about the timing of the bond sales, which must first be approved by China's regulatory agencies.
Both Standard Chartered and HSBC say their strategy is to support the continued development of Mainland China's financial markets – although both banks were also careful to say that those markets were already well capitalized and extremely liquid.
For Standard Chartered, the sale of the yuan-denominated bonds may carry an added bonus – providing the funds the London-based lender needs to finance its already fast-paced expansion in China, where its business has been growing at an average annual rate of 80% for the past four years.
For China, the liberalized bond-sale rules could have the following benefits:
- For China-based companies that want to invest abroad – or that want to buy foreign companies, product lines, or other assets – these new bonds will make it possible to do these deals more easily, and at a much lower cost.
- Beijing had already launched an official campaign that urges "Corporate China" to acquire overseas companies and assets. But there had to be a liberalization of the financial system for this to happen. So back in August, in fact, for the first time in 11 years, China's government eased rules governing its foreign-exchange systems.
- These new regulations permit companies to retain foreign-exchange income offshore, if they want, and thus helped pave the way for the new bond market because it stokes potential demand for dollar-denominated investments.
- And that comes at a perfect time for – up until now – the ongoing global financial crisis, which has made Chinese investors wary of buying foreign-currency bonds that were issued outside China. But these bonds will be created inside China, effectively short-circuiting that worry.
News and Related Story Links:
HSBC, StanChart prepare to issue yuan bonds in China.
Money Morning Special Report:
How the New 'Yuan Carry Trade' Will Add to China's Global Muscle, and Possibly Even Accelerate the U.S. Recovery.
Peter A. Sands.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.