'Panda bonds' may help China hold yuan down

BEIJING/HONG KONG - China is cuddling up to the world's capital markets with the authorisation of "panda bonds", yuan debt issued by foreign entities, a move that bankers say fits nicely with the government's financial strategy.

The new bonds should not only give a boost to the fledgling market in yuan debt, they could also help Beijing with its efforts to relieve upward pressure on the currency, analysts say.

China opened its domestic debt market to the Asian Development Bank and International Finance Corp, part of the World Bank group, last week, allowing them to raise a little over 2 billion yuan ($NZ362 million) in debt.

"This will be a good first step for developing a sound institutional framework for China's domestic debt market," said Qu Hongbin, Hong Kong-based economist with HSBC.

"Allowing foreign agencies to raise capital in China means that they no longer need to raise funds overseas and bring foreign currency into China, which helps ... relieve upward pressure on the yuan over time," he said.

A vibrant local market would also mean that companies would not have to look to offshore markets for funding, which would help keep down China's foreign debt.

Many Asian countries are trying to boost domestic debt markets to move away from an over-reliance on bank lending, which was partly to blame for escalating the 1997/98 Asian financial crisis, when a flight of foreign capital sent Asian currencies tumbling.

If panda bonds took off, the market could help cut China's balance of payments surplus over time, because raising funds at home naturally reduces capital inflows.

"Local-currency bonds by foreign issuers can help reduce the currency risks that some of the East Asian countries currently face and that are caused by the large current account surpluses," the ADB said in a research paper published earlier this year.

Beijing, which unveiled a mild revaluation of the yuan in July, is stepping up its efforts to curb hot money inflows betting on a rise in the yuan and encouraging domestic companies to set up factories overseas to help take the heat off.

China's foreign exchange reserves, the second largest in the world, grew by $US20.8 ($NZ30.43) billion in August to $US753.2 ($NZ1102) billion, the China Business News said last week, suggesting no let-up in the upward pressure on the yuan since the 2.1 percent revaluation.

"We cannot see any impact from 'panda' bonds on the yuan now, but such issues are in line with reforms to ease pressure on the yuan," said an executive at CITIC Securities in Beijing.

- REUTERS