The government will allow more foreign institutions to sell
yuan-denominated bonds in the country and buy foreign exchange with
the proceeds to remit the money overseas, Deng Xianhong, deputy
head of the State Administration of Foreign Exchange, said
yesterday.
China permitted foreign institutions to issue yuan bonds in the
country in 2005. Two international financial institutions, the
Asian Development Bank and the International Finance Corp, have got
the green light to do so but have been told it's mandatory to spend
the money in China.
The new move will not only quench the capital thirst of some
foreign institutions in China, but also help reduce the country's
balance-of-payment surplus, and thus ease the pressure on the
government to revaluate the yuan, analysts said.
Some foreign banking institutions need to extend
yuan-denominated loans, but they are weak in absorbing yuan
deposits, said professor of finance in Renmin University of China
Zhao Xijun. "The new move will add to their source of yuan
capital."
China slashed quotas for short-term overseas borrowings both by
domestic and foreign financial institutions in March. Foreign banks
and non-banking financial institutions can borrow from overseas up
to only 60 percent of the 2006 level by the end of next March,
increasing their thirst for the Chinese currency if they are do
renminbi business.
The move will also help reduce China's capital account surplus,
Zhao said. The surplus was US$10 billion last year, which, coupled
with the country's whopping current account surplus, constitutes
the pressure on the government to revaluate the yuan and rein in
liquidity in the market.
The measure is similar to China's qualified domestic
institutional investor (QDII) scheme, he said, which was launched
last April to allow domestic institutions to channel client funds
overseas.
The scope of qualified institutions was expanded with the
authorities recently allowing banks, brokers, insurers and asset
management companies to invest in overseas equities using client
money.
Initially, Zhao said, the yuan bonds issued by foreign
institutions would be small. But in the long run, they could become
sizable to have a substantial impact on the market. "The process
should be gradual to avoid risks and shocks."
Some financial institutions with adequate capital and high
ratings will be selected first and later other non-financial
institutions will be allowed, he said.
During the Asian financial crisis a decade ago, some foreign
institutions in Hong Kong had issued bonds to pool in the HK dollar
before joining hands with international speculators to dump the
currency to attack the financial market of the island.
"It is a lesson we should learn from," Zhao said.
(China Daily August 10, 2007)