One of the surprises of the year has been the increased internationalization of the yuan, even though the capital account has not been liberated and the currency remains tightly managed.
We were skeptical of the significance of the yuan swap lines with other countries, primarily emerging markets. However,, more impressive has been the growth of a yuan market in Hong Kong. It is a bit confusing in the sense that Hong Kong is a part of China (special administrative region) and of course HK has its own currency (pegged to the dollar). However, the HK financial market is regarded by investors, and treated by Chinese officials, as offshore.
Yuan deposits in HK have more than doubled this year and were near CNY130 bln at the end of August. Yuan trading in Hong Kong has also increased recently. For various reasons, largely regulatory in nature, the demand for yuan in Hong Kong appears quite strong and this is reflected in the yuan trading in HK at a premium to the mainland and that spread has grown in recently.
Part of this demand for yuan appears to be emanating from bond investors. The logic is that international investors quota for onshore investments has been used primarily for buying Chinese equities. This has forced fixed income managers to look for yuan-denominated bonds offshore.
Although some multinational banks, companies and some multilateral agencies like the Asian Development Bank are issuing yuan denominated bonds, state-owned Chinese banks appear to be among the most active. And some recent deals and indicative pricing shows that it may be cheaper for these entities to raise capital in HK than in Shanghai or Beijing.
China seems committed to developing this "offshore" market and going forward it is reasonable for to expect the HK market for yuan, and yuan-denominated bonds to continue to broaden and deepen.