Hong Kong's yuan bond market is set to receive a big boost after the National Development and Reform Commission (NDRC) signalled it plans imminent moves that would allow more domestic financial institutions and enterprises to issue yuan bonds in the city.

The NDRC will work "actively and prudently", on the premise of risk control, to expand the number of qualified domestic issuers as well as issuance size in the city, the agency said on Friday in an email reply to China Daily on questions about the pace of yuan bond issuance in Hong Kong.

"Factors including the market capacity of yuan bonds in Hong Kong as well as expectations for yuan appreciation will be taken into consideration in determining the moves," the policy planner said.

The offshore yuan market in Hong Kong has been developing rapidly over the past couple of years, with yuan bonds leading the growth as investors' appetite for the product is still growing amid strengthening expectations for the Chinese currency.

The 5 billion yuan ($783 million) retail tranche of sovereign bonds in Hong Kong issued by the Ministry of Finance had been oversubscribed by three times, the ministry said on Thursday.

"Hong Kong's yuan bond market development will help further strengthen the financial market linkages between Hong Kong and the mainland, enhancing Hong Kong's status as an international financial center and enriching the yuan's investment channels in the city," said the NDRC.

"It is also conducive to better play the yuan's function in cross-border trade and investment as well as supporting Hong Kong to become an offshore yuan business center and an international asset management center," the government agency added.

The words echoed Vice-Premier Li Keqiang's remarks during his visit to Hong Kong two weeks ago, who brought a basket of new measures to boost the city's economic development and to enhance cross-border co-operation, particularly the expansion of the yuan-denominated asset market.

While previously only mainland financial institutions and overseas companies were able to issue yuan bonds in Hong Kong, the new policies brought by the vice premier open the door to mainland onshore non-financial companies, which are now given access to this offshore fundraising channel.

A yuan settlement pilot scheme for foreign direct investment (FDI) will be launched in phases and Hong Kong enterprises are also encouraged to use yuan to make direct investment on the mainland, according to these new measures.

The NDRC told China Daily in the email that it will also modify the foreign investment project management approach, and step-by-step promote yuan-funded foreign investment projects on the mainland to effectively control hot money and maintain the stability of the financial market.

The process will "help promote Hong Kong's yuan market development as well as the yuan's internationalization," said the regulatory body.

Yuan deposits in Hong Kong increased to 572.2 billion yuan in July, up 3.4 percent from a month earlier, the Hong Kong Monetary Authority said on Wednesday. It is more than five times the 103.7 billion yuan recorded at the end of July last year.

litao@chinadailyhk.com

China Daily

(HK Edition 09/03/2011 page2)