BOCHK to Invest CD Proceeds Into China Bond Market

Written by Donald A. Elizondo    Wednesday, 21 December 2011

The Hong Kong division of Bank of China has obtained approval to invest proceeds from renminbi-denominated certificates of deposit into China's onshore bond markets. The move offers it investment diversity and helps develop the mainland's market. Bank of China (Hong Kong), the Hong Kong-based subsidiary of China's top-four bank, has received approval from the People's Bank of China (PBoC) to invest part of its proceeds from offshore renminbi-denominated certificates of deposit into China's interbank bond market. This is part of a pilot scheme for renminbi clearing banks and other eligible institutions outside the mainland to invest in the mainland's interbank bond market, which was originally launched by the central bank in August 2010. Allowing offshore financial institutions to invest in onshore bond markets would broaden the investor base for the nation's interbank bond markets. And the fact these institutions would need central bank approval before transferring funds means that the Chinese government will continue to control the renminbi inflows. "The pilot scheme has been announced for quite some time but very few banks have actually utilised it; Bank of China (Hong Kong) is one of the pioneers," said a source familiar with the situation. Several subsidiaries of Chinese lenders including Bank of China (Hong Kong), China Citic Bank International and Wing Lung Bank, which is owned by China Merchants Bank, have raised offshore renminbi funds by selling certificates of deposit (CDs) in Hong Kong. These banks are eager to expand their renminbi deposit base as they see a potential rise in demand outside the country's borders for loans denominated in the Chinese currency. Bank of China (HK) has for example issued about Rmb8 billion (US$1.24 billion) in CDs over the past few years. Under the pilot scheme renminbi clearing banks in Hong Kong and Macau, participating banks for renminbi cross-border trade settlement, and offshore central banks or monetary authorities can apply to the PBoC invest in China's onshore interbank bond market. These institutions can use renminbi funds obtained through central bank currency cooperation, cross-border trading or investment in renminbi business to do so. Allowing relevant offshore financial institutions to invest in the mainland's interbank bond market gives these institutions a channel to hedge against the exchange rate risk of their renminbi funds, as well as offering them a higher-yielding investment option. China Merchants Bank for example issued a renminbi-denominated and settled two-year CD at 1.2% in April, compared to the prevailing 3.4% yield of comparable bonds traded onshore at the time. On June 9, the Wall Street Journal (WSJ) reported that Bank of China had won the backing of the PBoC to bring onshore about Rmb10.5 billion which it had raised via offshore renminbi bonds. Citing unnamed sources, the report said that Bank of China would invest the repatriated funds in China's domestic bond market. The report, however, did not specify whether it refer to the top-four bank in China or its Hong Kong subsidiary. It also did not mention where the majority of its offshore renminbi funds come from. Royal Bank of Scotland (RBS) was highly sceptical about the validity of the news report, issuing a research note on the same date questioning why Chinese authorities would open up the interest rate arbitrage gap between the offshore renminbi bond market and onshore domestic bond market by allowing Chinese banks to invest their offshore renminbi bond proceeds in the onshore bond market. "If this was allowed, it would instantly open up the interest rate arbitrage gap on the 200 plus basis points spread between the onshore and offshore markets," wrote Chia Woon Khien, head of local markets strategy at RBS, in a research note dated June 9. "I don't know if the Wall Street Journal [which originally reported news of Bank of China remitting funds last week] was essentially referring to the same thing. What I understand is, Bank of China (Hong Kong) recently won the approval from PBoC to remit its offshore renminbi funds, partly raised in CDs, and invest them in China's onshore bond market," the source said.

Last Updated ( Wednesday, 21 December 2011 )