China’s central bank issues first ever dim sum bond in London

Sustained intervention by China’s central bank and policy changes are prompting traders to change their views and raise year-end targets for the yuan, after its surprise devaluation in August sparked fears the Beijing wanted a sharp fall. Creating a bond index – establishing a benchmark that filters asset quality – is one step towards resolving the resulting issue of investor unfamiliarity with Chinese assets.

Chinese banks often buy 30 per cent to 40 per cent of issuances from fellow lenders, including those denominated in dollars, euros and yuan.

Asian investors took 51 percent of the bonds. The rest were nearly equally split between European and USA buyers. While a gauge of capital outflows compiled by Bloomberg climbed to a record of 194.3 billion yuan in September, the central bank drained a net 45 billion yuan from the banking system via open-market operations this week, after withdrawing 70 billion yuan a week earlier.

While other observers, including the worldwide Monetary Fund, have said recently that the yuan is fairly valued, the U.S. Treasury said Monday that the currency “remains below its appropriate medium-term valuation”. Ceremonies were also held simultaneously in Singapore and London.

London yuan deposits stood at 20 billion yuan ($3.15 billion) at the end of 2014, down from the mid-year’s 25.4 billion yuan level, but higher than 14.6 billion yuan at the end of 2013, according to City of London data. Yuan deposits in Hong Kong were 979 billion yuan in August. The recent pickup in demand for offshore yuan debt mostly comes from Chinese investors, particularly banks repatriating funds from onshore to offshore markets, money managers and analysts say.

Sources have told Reuters the PBOC plans to issue up to 5 billion yuan ($787 million) of one-year bills in London.

China intervened “heavily” in the foreign-exchange market in the last three months, spending an estimated total of US$229 billion (RM982.513 billion) to prevent the yuan from falling, according to the report. London is a financial powerhouse and it knows Chinese business so this move will no doubt position London as the leading offshore centre for RMB trading.

“China is the second-biggest economy in the world and it now has a very under-developed capital market”.

Treasury’s latest report stood in contrast to the previous report in April and several before that in which the administration said it believed that China’s currency was “significantly undervalued”.