The launch of Renminbi sovereign bonds in Hong Kong on Monday shows China's efforts to boost the international use of the yuan step by step, officials and analysts said.

The bond issue, worth only 6 billion yuan (878.5 million U.S. dollars), marked a key milestone in the internationalization of the RMB.

Hong Kong was chosen for, and will benefit from, the milestone bond sale thanks to its unique position as the international financial center providing desired cushion against the potential risks when the program was launched, analysts said.

Boosting international use of RMB

The bond issue in Hong Kong came earlier than expected, said Hu Yifan, an economist with CITIC Securities.

"The need for the RMB to go international and convertible has been growing along with the increasing importance and openness of the Chinese mainland economy and the risks arising from over- reliance on the United States dollar as the reserve currency," said Tse Kwok-leung, head of economic research of Bank of China ( Hong Kong) Limited.

China has been launching pilot RMB programs over the years, but the pace has obviously quickened since the onset of the global financial crisis. Pilot RMB programs launched in Hong Kong over the past 12 months also included yuan-denominated cross-border trade settlement and trade financing, yuan bonds issued by policy banks, commercial lenders and the branches of foreign banks, and currency swaps.

The sovereign bond issue would help "boost the international use of the RMB in a steady and orderly manner," the Chinese Ministry of Finance quoted Acting Chief Executive of the Hong Kong Special Administrative Region (HKSAR) Henry Tang as saying.

The sovereign bond sale in Hong Kong serves the purpose of water testing to "see how it is received by international investors." Hong Kong has a unique strength in that it provides the desired cushion against potential risks when the pilot programs were launched, given that the mainland capital market was yet to open up, Tse said.

Boosting nascent bond market in Hong Kong

The bond issue ahead of the Chinese National Day showed the central government's support for Hong Kong, Vice Minister of Finance Li Yong said.

It will help Hong Kong build on its strength as an international financial center by boosting the nascent bond market in Hong Kong, Tse Kwok-leung said.

"It calls for a banking system, a stock market and a bond market, all developed, to make a developed international financial center," Tse explained.

Hong Kong has been aspiring to be the leading international financial center in the Asian time zone.

Government statistics showed that the total assets of Hong Kong 's banking system and the size of its stock market were both about six times its gross domestic product, compared with a bond market equivalent to 43 percent of its gross domestic product.

Bonds issued in Hong Kong in 2008 totaled 424.4 billion HK dollars (54.4 billion U.S. dollars), with 67 percent issued by the Hong Kong Foreign Exchange Fund, which was established to defend the Hong Kong dollar peg to the U.S. dollar.

The other 33 percent were accounted for by development banks from outside Hong Kong and corporate bonds issued by local players. There were no sovereign bonds.

Tse said the bond issue will also help improve the liquidity of, and diversify, the local bond market. It will also improve the operation of the RMB bond market in Hong Kong by helping find the benchmark interest rate in the local market.

Tse said the demand for sovereign bonds issued by an economy as strong as the Chinese mainland was huge, given the impact of the global financial crisis on the corporate bond market.

Vice Minister of Finance Li Yong also said he believed the bonds will be well received.

"I believe the RMB sovereign bonds will prove popular with investors looking for safe and prudent investments. I definitely think it will be successful,"