China paved the way for international companies to issue securities

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CHINA has paved the way for international companies to issue securities in its currency for the first time, telling two foreign commercial banks this week they have its backing to sell yuan-denominated bonds to overseas investors.

The China units of London-based HSBC Holdings PLC and Hong Kong's Bank of East Asia Ltd. each confirmed an official notice that they have been granted permission by authorities in China to launch international bonds denominated in yuan. The banks plan to issue the debt in Hong Kong to fund their China-incorporated banking networks, which are the two largest among foreign banks operating in the world's most populous nation.

Neither bank announced details on the timing or amounts of their expected offerings.

Such bond issues can provide multinational companies a new fund-raising channel at a time when credit markets elsewhere lack liquidity. They may also establish benchmark yields for future issuers. The issues will also help make the yuan a more internationally relevant currency and reinforce Beijing's pledge to further open its capital markets.

Beijing is increasingly promoting plans for a more internationalized yuan, such as setting conditions for merchandise exporters to settle contracts using the currency instead of the U.S. dollar.

The immediate repercussion of the upcoming bond offerings may be more modest, however; the banks are expected to primarily tap into the existing yuan savings accounts of investors in Hong Kong. A small number of similar issues have already been made in Hong Kong by Chinese issuers, including commercial and government banks, and have been well received.

'We believe that [a yuan] issue by HSBC China will help establish a representative pricing benchmark for foreign banks requiring funding, and will help the development of Hong Kong's offshore (yuan) market,' Richard Yorke, president and chief executive of HSBC Bank (China) Ltd., said in a statement. The bank, which was profitable in China last year, said its local operations remain well capitalized and that it isn't pursuing the plan because it needs funding.

Fund raising inside China has long been a goal of foreign companies. They are attracted to the nation's nearly 50% savings rate and the equivalent of $7.85 trillion that individuals, corporations and the government had socked away in bank deposits at the end of March, according to central-bank figures.

Yuan funding is also appealing because Chinese regulations can make it difficult for multinational companies seeking to expand their operations to simply shift money into the country from overseas.

Until now, Beijing hasn't endorsed substantial yuan fund raising by foreign companies, though in recent years it has signaled its support in principle for such activity. A number of companies with extensive operations in China, including HSBC and Bank of East Asia, have also expressed a desire to sell shares on the Shanghai Stock Exchange. The banks already accept deposits from Chinese individuals and companies.

Mainland China's increasingly active bond markets, meanwhile, have so far remained largely off limits to foreign issuers and investors. An exception was a 2005 offering by the World Bank's International Finance Corp., which sold 1.13 billion yuan ($165.5 million) of Chinese-currency securities on the country's interbank bond market. Those securities were called 'panda' bonds.

Government entities are the predominant issuers of bonds on the country's debt markets and state banks the primary investors. The market's largest-ever corporate issue was made this week, a 50 billion yuan sale of 10- and 15-year bonds by state-owned Agricultural Bank of China. The 20 billion yuan, 10-year tranche was sold with a coupon of 3.3%.

Last weekend, Wu Xiaoling, a respected former central banker and currently a senior member of China's legislature, called on the government to build a more robust bond market and said key planks remain missing, including a trustworthy system for credit-scoring of issuers. 'If China wants a bond market, it needs to develop credit ratings,' Ms. Wu said.

James T. Areddy

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