Yuan bond market: slow to flower in London

December 10, 2012

London’s offshore yuan bond market, launched to much fanfare last October,  is still struggling to get many deals off the ground. Banks and authorities from Britain, China and Hong Kong met last week in London at their twice-yearly forum to discuss reasons. Liquidity, or lack of it, was deemed to be the main hurdle.

China Construction Bank last month became the first Chinese borrower to launch a London-listed bond. But there have only been a handful of London bonds this year, as the nascent offshore market continues to lag far behind Hong Kong.

Spencer Lake, co-head of global markets at HSBC, told a briefing last week:

We have not yet seen the competitive pricing such that you can only issue in London.  There are probably 50 entities around the world that would love to come to the market tomorrow, but we still need to see more trading, more liquidity build up.

China is considered to be using the offshore market as a testbed for making its onshore currency more convertible. Some commentators, including last week former People’s Bank of China adviser Xia Bin, say the Bank of England and PBOC should open a renminbi swap line to aid liquidity.John McCormick, chairman, Asia Pacific at RBS shares this view:

China has no cross-currency arrangement with the UK, personally I believe this would make sense.

The stumbling block here is that the Bank of England is unlikely to want to open a swap line for a currency that is not convertible.

Meanwhile, banks have started to quote more currencies against the yuan and to swap yuan bonds into a bigger range of currencies. McCormick said RBS was talking to clients about issuing London-listed bonds, noting that the London market could attract Asian corporates who wanted to broaden their investor base.

And at least the yuan is starting to show an appreciating trend once more, making it a more attractive currency to hold. It is up 1 percent against the dollar this year.

As David Bloom, head of FX strategy at HSBC, told the briefing last week, if you forget the renminbi, you are:

missing the flower that’s blooming in the corner amidst this decay in the West.




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