China will allow overseas financial institutions to issue renminbi-denominated bonds, the government announced Thursday.

The decision is expected to make it much easier for foreign banks to raise local currency for loans to overseas and domestic companies.

Guo shuqing, director of the State Administration of Foreign Exchange, said earlier this week that the central government will select certain international financial institutions to issue renminbi bonds for the first time in China's mainland.

The move will help foreign lenders, which have just been allowed to provide renminbi services to Chinese enterprises, to build up their renminbi capital reserves to serve a wider range of clients amid the country's opening up of its financial markets.

Currently, banks can't raise enough local currency to meet growing demand for renminbi loans.

China pledged in its agreement to the World Trade Organization that it would permit overseas banks to provide renminbi services to individual local clients by December 11, 2006.

Overseas banks can accept renminbi deposits from foreign-funded enterprises, expatriates and residents of Hong Kong, Macau and Taiwan, and they can borrow up to 40 percent of their renminbi-denominated liability from the Chinese interbank funding center.

"However, it is even more difficult for us to borrow renminbi lending in the interbank market as Chinese banks are reluctant to lend renminbi to us due to the higher reserve requirement demanded by the central bank," said Timmy Leung of the Bank of East Asia's.

The people's Bank of China lifted the reserve requirement for banks and other deposit-taking financial institutions from 6 percent to 7 percent earlier this year.

(Shanghai Daily December 5, 2003)