By Staff reporters Zhang Yuzhe and Xu Ke

(Caijing.com.cn) Financial institutions based in mainland China lack enthusiasm for issuing yuan-denominated bonds in Hong Kong due to relatively higher costs and insufficient demand, said government officials and local bankers.

A central bank official who did not wish to be named told Caijing that no domestic institutions have applied to issue yuan bonds in the special administrative region, or SAR, so far this year.

The official said that in contrast, HSBC and Bank of East Asia have already won regulatory approval to issue yuan bonds, and other foreign banks incorporated in China have also expressed their desire to do so.

HSBC (China) Chairman Vincent Cheng told Caijing: "Many Hong Kong buyers hold their yuan bonds till maturity, and issuing yuan bonds has higher costs attached compared to taking deposits." Both HSBC and BAE have yet to announce detailed bond issue schedules.

Since China opened up yuan bond issues in Hong Kong to domestic institutions in June 2007, China Development Bank, The Export-Import Bank of China, Bank of China, China Construction Bank and Bank of Communications have been granted licenses. During the past two years, the lenders sold a combined 22 billion yuan worth of yuan bonds in the SAR.

China Development Bank still has a quota of 3 billion yuan bonds that have not been sold. Sources told Caijing that the bank, which was the first to issue such bonds in Hong Kong, is likely to expend its quota this month, depending on market conditions.

Though mainland institutions' yuan bond issues in Hong Kong are a step towards creating a yuan-denominated offshore market, there is insufficient demand as the secondary market is underdeveloped. Hong Kong banking system's yuan deposits currently total just 53.1 billion.

The central bank has said that moves towards the internationalization of the Chinese currency including yuan bonds issue in Hong Kong should be driven by market forces, rather than government policy.

(1 yuan = 14 US cents)

Full article in Chinese: http://www.caijing.com.cn/2009-06-04/110178085.html