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China is considering allowing foreign financial institutions to issue renminbi bonds on the mainland, a source from the China Banking Regulatory Commission (CBRC) said on Friday.

"The country's financial regulators will soon work out a plan to guide foreign financial institutions" in issuing such bonds on the mainland, said an official with the industry watchdog, who declined to be named.

He declined to give a date when the plan will be finalized.

The move will help ease pressure on the yuan to appreciate, and boost the country's underdeveloped bond market, he said.

China opened its renminbi retail business to foreign banks on December 11 last year. However, as their undeveloped networks on the mainland failed to draw sufficient deposits, foreign lenders have had to get money from abroad or borrow money from the inter-bank market to supply lending.

"Getting money from abroad has somehow added appreciation pressure on the Chinese currency and led to a flush in liquidity," Wu Yonggang, an analyst with Guotai Jun'an Securities, said.

Allowing foreign lenders to issue bonds will help diversify the issuers and improve the market's infrastructure, Wu said.

Charlene Chu, director of financial institutions of Fitch Ratings (Beijing), said many foreign banks have very limited access to raise renminbi funds.

The issuance of bonds will help enhance their fund-raising capacity.

HSBC, the largest European bank and one of the earliest lenders to incorporate on the mainland, was said to have submitted an application to the CBRC in April to issue renminbi bonds, according to a source close to the bank.

He said HSBC had intended to use the money to purchase A shares of Bank of Communications when the Chinese bank launched an IPO in Shanghai in May.

As other foreign banks may also submit such applications, Chinese financial regulators decided to draw up a scheme before it allows any foreign banks to do that, he said.

Both Chu and Wu agreed that it is quite likely the Chinese government may only allow locally incorporated foreign lenders to issue such bonds in order to control risks.

(China Daily June 16, 2007)