The People's Bank of China (PBOC) announced on October 14 that foreign institutional and individual investors will be able to apply for permits to make direct investments using the yuan, on the condition that their investments are in line with China's current laws and regulations.
As China's favored offshore center for the yuan and a springboard for the internationalization of the currency, Hong Kong will serve as the main clearing point for inflows of the yuan FDI.
John Tsang, Financial Secretary of the Hong Kong Special Administrative Region (HKSAR) government welcomed the move. t provides transparency and certainty for the related procedures in making foreign direct investments in renminbi, he said, adding that the rules will lower the risk of currency exchange for Hong Kong enterprises investing in the mainland, and significantly increase demand from international firms for yuan financing.
He said firms can make yuan-denominated FDI in the mainland through Hong Kong via banks, debt and equity, stimulating investment channels for the growing pool of yuan funds in Hong Kong.
Recent plunges in the value of offshore-traded yuan compared to the onshore rate had prompted some analysts to predict that Beijing would put the brakes on the pace of yuan internationalization.
However, other recent moves to extend the offshore use of the currency go against such statements.
John Tsang said in a blog posting on October 23 that mainland regulators are in the final stages of preparations for launching exchange-traded funds that will give mainland investors access to Hong Kong-listed stocks.
He added that the renminbi qualified foreign institutional investor program, which will allow qualified brokerages to invest in mainland securities, is also in its final preparatory stages.
State-owned Chinese steelmaker Baosteel also won approval to issue RMB 6.5 billion ($1 billion) in yuan-denominated bonds in Hong Kong, authorities announced October 20, making it the first Chinese company other than a bank to sell yuan bonds directly to international investors.
According to a previous Financial Times report, the yuan was a more popular currency for company bond sales than the euro for the first time in the third quarter. Renminbi-denominated corporate bond issuance by non-financial companies remained relatively steady at RMB 200 billion ($31.1 billion), while euro-denominated sales more than halved to $26.4 billion, according to data provider Dealogic.
Yuan deposits in Hong Kong have reached RMB 609 billion, more than six times the level at the start of 2010, according to the Financial Times, although the report said the growth of assets, including yuan-denominated bonds, has been much slower, making it hard for banks to manage their burgeoning liabilities in the Chinese currency.
As such, these recent moves will be welcomed by investors and financial institutions looking to or already holding substantial yuan assets.
