PBOC to issue $2.9b bonds in HK's offshore yuan market

Monetary authorities in China stepped up their efforts on Wednesday to bolster the supply and trade of renminbi in offshore markets amid sell-off concerns and growing trade friction.

Close on the heels of the warning made by a central bank vice-governor last week, the People's Bank of China, the central bank, took decisive action on Wednesday by launching a new monetary policy tool in Hong Kong to soak up excess liquidity in the offshore markets.

The PBOC said it will issue 20 billion yuan ($2.9 billion) in the form of central bank bills in Hong Kong's offshore renminbi market on Nov 7 for qualified institutional investors from China and abroad. It said the issue will comprise two tranches: 10 billion yuan in the form of 91-day bills and 10 billion yuan in one-year bills. The Hong Kong branch of Bank of Communications will be the issuing and lodging agent for the sale.

The bond sale will be the mainland's first sale of such financial instruments in Hong Kong, following the issue of 5 billion yuan in one-year bills in London's offshore renminbi market in October 2015. The London sale was the first-ever sale of the instruments outside China.

According to money market analysts, the current PBOC move is an indication that the central bank is looking to extend its yuan management measures to the freely-traded offshore market also, said experts. Contrary to expectations that the PBOC would come out with administrative measures to shore up the currency, the new move is based on the market-decisive trading mechanism, an indication that the central bank is changing its approach on stabilizing the currency value, they said.

Other new measures have been introduced earlier to adjust the offshore renminbi's liquidity, including a countercyclical factor and the reserve requirement. Some analysts said the central bank is trying not to defend the currency by consuming the more than $3.1 trillion of foreign exchange reserves that China holds.

Compared with the more than 600 billion yuan of renminbi deposits in Hong Kong as of the end of August, the 20 billion yuan issuance is not quite large, and further issuance is possible in the future depending on the market demand, said Ming Ming, an analyst with CITIC Securities.

Under this mechanism, financial institutions can buy such bills from the central bank and gain a certain return at the bidding interest rates. The effect will more or less be like soaking up offshore renminbi liquidity and raising the borrowing costs for speculators who want to sell more renminbi when betting on depreciation.

The onshore renminbi was traded at 6.9734 per dollar on Wednesday. In the offshore market, it was traded at 6.9775 per dollar, thanks to the 90 point boost after the announcement of the new tool.

Concerns over the renminbi have risen in recent days after the currency hit its lowest level in a decade on economic concerns and rising trade tensions. On Wednesday, China's national statistics agency reported a lower manufacturing purchasing managers' index of 50.2 in October, narrowing from the 50.8 seen in September and an indication of a slower expansion in manufacturing activities.

In the money market, the main topic of discussion has been whether the currency would depreciate further and cross the psychological threshold of 7 yuan per dollar. But the current move seems to have doused that fears at least for some time

Ma Jun, a member of the central bank's monetary policy committee, said the current move will stabilize market expectations and keep the renminbi exchange rate stable and at a reasonable equilibrium.

A research note from Citigate Dewe Rogerson, an international financial consultancy, said that ensuring stable economic growth and shoring up investor confidence are the top priorities for Chinese policymakers.