Financial Regulatory Forum

Yuan internationalization takes off in Hong Kong

By Guest Contributor
August 31, 2011

By Helen H. Chan (Hong Kong)

HONG KONG, Aug. 31 (Business Law Currents) – Yuan supporters both inside and outside of China are applauding anticipated regulatory changes in Hong Kong aimed at loosening capital controls over the renminbi, China’s national currency.

During his visit to Hong Kong recently, China’s Vice Premier Li Keqiang announced the formation of a spate of regulatory changes to the existing legal framework governing yuan-denominated trade and financial transactions between the special administrative region and mainland China. The 36 regulatory measures include amendments to existing items such as dim sum bond offerings, to the establishment of new mechanisms such as the pilot renminbi foreign direct investment initiative for offshore renminbi investors.

The changes are positive news for foreign companies and international institutional investors such as private equity funds, venture capital and banks. Multinational banks such as Standard Chartered Plc have benefitted managing renminbi flows between Hong Kong and the PRC. Deeming its yuan-denominated trade and investment business “hugely successful”, the bank intends to focus additional resources into this area.

Rocked by ongoing inflationary pressure, credit concerns and volatile equities markets, businesses are banking on yuan-denominated bond issuances to boost their capital base. Last month, Australia’s Agincourt Capital Management LLC issued A$500 million (US$521 million) worth of dim sum bonds in Hong Kong. Linked to the real estate sector, the bonds are intended to give investors indirect access to the PRC economy.

Similarly, British supermarket chain Tesco has retained HSBC and Standard Chartered to sell a three-year dim sum bond in Hong Kong. McDonald’s Corp, which was the first multinational company to issue dim sum bonds in Hong Kong, is rumored to be planning a second sale.

Chinese lenders are also rushing to raise funds after the PRC government announced intentions to raise capital adequacy requirements (CAR) earlier this summer. For more information on CAR-related regulatory developments in China, please see Basel III: Chinese Banks Saving for New Capital Adequacy Ratio.

MORE BONDS

Mainland Chinese entities are expected to issue more renminbi-denominated bonds in Hong Kong, following the implementation of new regulatory measures. Previously only PRC financial institutions and non-Chinese companies were permitted to issue dim sum bonds in Hong Kong.

Recently, China’s Ministry of Finance issued RMB 15 billion (US$2.4 billion) worth of dim sum bonds in Hong Kong to institutional investors. According to data compiled by Thomson Reuters, RMB 88 billion (US$13.7 billion) worth of yuan-denominated bonds have been issued in 2011.

In addition to dim sum bond expansion, the new measures are a step closer towards establishing standardized procedures for yuan-denominated foreign direct investment through the pilot renminbi foreign direct investment (RFDI) program. The RFDI framework is expected to assist Hong Kong companies in investing in China in renminbi, as opposed to the USD-pegged Hong Kong dollar, which has depreciated significantly against the rising renminbi.

An initial quota of RMB 20 billion (US$3.1 billion) has also been allotted for non-Chinese companies to invest in PRC securities through the mini-QFII. Settled in renminbi, the new mini-QFII is modeled after China’s existing Qualified Foreign Institutional Investor program. For more information, please see China Private Equity: Offshore Funds, the Mini-QFII is Coming. The mini-QFII is expected to be launched in Hong Kong by the end of this year.

Together, these new measures have advanced the internationalization of China’s currency and are expected to further ignite Hong Kong as an offshore renminbi hub. Dim sum bond issuances in particular may prove to be immediately popular as businesses seek out cost effective ways to raise capital and investors look for investment options with guaranteed returns. Overall, domestic Chinese and foreign companies alike may also benefit from a variety of expanded yuan-denominated investment alternatives.

(This article was first published by ThomsonReuters’ Business Law Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Business Law Currents online at http://currents.westlawbusiness.com. )

 

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