Lenders establishing renminbi deposit pools to make way for renminbi-denominated businesses such as trade finance and lending.
Chinese banks are racing to build up their yuan deposit base in Hong Kong by tapping its flourishing debt market, as they expect a potential rise in demand outside the country's borders for loans denominated in China's currency.
Last month, the Hong Kong subsidiaries of lenders including Bank of China Ltd., China Construction Bank Corp. and China Merchants Bank Co. raised nearly 16 billion yuan ($2.47 billion) by issuing certificates of deposit, or CDs, according to data provided by HSBC Holdings PLC. Bank of China led the pack, with about eight billion yuan of CD issuance.
The banks' sales were the biggest driver in May for yuan-denominated debt issuance in Hong Kong, a sector that has enjoyed tremendous growth since regulators last year opened up the market for "dim sum bonds"—as yuan-denominated bonds issued outside mainland China are known—to a broad array of borrowers, amid Beijing's efforts to expand the use of the yuan beyond the mainland.
The CD-issuing Chinese banks plan to use the proceeds to expand their yuan lending in offshore markets, according to bank officials and analysts. Some banks also intend to invest some of the money in mainland China's market for interbank bonds, which generate higher yields than the cost of the CDs.
"We need to have yuan deposit pools to prepare for yuan businesses such as trade finance and yuan lending," says Frankie Kwong, treasurer of Wing Lung Bank, part of China Merchants Bank.
To be sure, Chinese banks—the first group of dim-sum bond issuers sanctioned by Beijing—traditionally have been big sellers of such debt in Hong Kong. But in recent months, their debt sales have been accelerating, as these banks seek to take advantage of the low funding costs enabled by growing demand for yuan-linked assets offshore.
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