China pricing first offshore bond in London to boost hub status

[LONDON] China plans to sell 3 billion yuan (S$630.8 million) of sovereign bonds in London on Thursday in the nation's first offshore sale outside of Hong Kong as the biggest emerging-nation economy seeks to internationalize its currency.

The securities will mature June 2, 2019, global coordinators Bank of China Ltd and HSBC Holdings Plc told an investor meeting also attended by representatives for the Bank of England and UK Treasury.

The offering may be hampered by recent trading weakness even as China seeks to broaden the range of assets in yuan overseas as the International Monetary Fund prepares to recognize the currency in its reserve basket. The yuan has slid 1.2 per cent against the dollar this month on mounting expectations for an increase in the Federal Reserve interest rates this summer.

The sale should provide a benchmark and "inject energy" into London's yuan market, said Xiaoxia Sun, director general of the finance department at China's finance ministry, who spoke in Mandarin with an English translator.

"The yield curve is taking shape."

Chancellor of the Exchequer George Osborne has sought to position London as Europe's dominant yuan hub. The UK capital was the first in the region to house a clearing bank for the Chinese currency. Britain also became the first foreign sovereign issuer of yuan bonds in 2014.

The yuan-denominated notes follow the issuance of one-year bills in London last year by the People's Bank of China.

On Wednesday, China's central bank weakened its currency fixing to the lowest since March 2011 as the dollar strengthened. The dollar's strength is shaking up a strategy that the People's Bank of China pursued over the past three months - a steady rate against the dollar, combined with depreciation against other major currencies.

"In the current environment where most people expect the yuan to weaken, it will probably be a difficult sell," said Kieran Curtis, investment director at Standard Life Investments Ltd in London, which manages US$10 billion in emerging-market assets.

The bonds "could be priced cheap to encourage people to get involved in the deal," he said, speaking before the meeting.

The yield on benchmark 10-year sovereign debt in China was little changed at 2.94 per cent on Wednesday, according to Chinabond data. Offshore notes traded in Hong Kong yielded 3.69 per cent on Tuesday.

The Finance Ministry will also continue to sell yuan bonds in Hong Kong this year, with more details to be announced next month, according to Ms Sun.

BLOOMBERG