Citigroup Inc, HSBC Holdings Plc, Standard Chartered Plc and CIMB Group Holdings Bhd plan to apply to invest in yuan bonds following the People's Bank of China (PBOC) decision to open up its interbank debt market.

Andrew Au, the Shanghai-based chief executive officer of Citigroup's Chinese unit, said the bank is working on the documents required for units outside China to invest in the market. John Thang, Standard Chartered's head of financial market sales in Northeast Asia, said the bank's Hong Kong branch will submit an application "soon."

HSBC is studying application procedures, it said in an e-mail.

Lee Kok Kwan, deputy chief executive at Kuala Lumpur-based CIMB, Malaysia's second-largest banking group, said his company intends to apply. The Hong Kong Monetary Authority (HKMA) said it is investigating details of the program.

Overseas demand for the yuan has grown since China ended the yuan's two-year dollar peg on June 19, giving scope for appreciation in the currency of a nation that surpassed Japan as the world's second-largest economy last quarter.

The PBOC said on Aug 17 it would let overseas financial institutions invest yuan holdings in the nation's interbank bond market to promote greater use of the yuan in global trade and finance.

"There will be a level of interest on the part of central banks and foreign participants," Au said. "China is already the world's second-largest economy based on government data in the second quarter. It would be logical for a lot of international players to be interested."

The PBOC didn't reply to a fax from Bloomberg seeking more details on the licensing procedures and the banks who have submitted applications.

China approved use of the yuan to settle cross-border trade with Hong Kong in June 2009, part of a drive to reduce reliance on the US dollar.

Lack of investments

The popularity of that program was limited by the lack of investments available in the currency.

Trade settlement using the yuan more than doubled to 48.7 billion yuan (US$7.2 billion) in the second quarter from the previous three months, bringing the total amount in the past year to 70.6 billion yuan, the PBOC said on Aug 5. Au said the amount of settlements using the yuan will expand after China provides overseas investors with more channels to invest in yuan funds.

He said he "wouldn't be surprised" if the yuan became one of the three major currencies in the global monetary system.

Yuan deposits in Hong Kong climbed 4.8 percent in June to a record 89.7 billion yuan, according to data released by the HKMA on July 30.

"The HKMA welcomes the scheme that allows central banks and monetary authorities to invest in the mainland's interbank market and we are following up with the PBOC on the scheme details," the HKMA said in an e-mail to Bloomberg on Aug 20.

Bank Negara Malaysia, which in 2009 won a QFII, or qualified foreign institutional investor license to invest in Chinese stocks and bonds, declined to comment on whether it intends to apply to invest in yuan bonds.

Enhanced potential

Citigroup and Credit Agricole CIB said on Aug 18 that China opening up its bond market to foreign banks would enhance the currency's potential as a foreign-exchange reserve asset.

Overseas banks and central banks must first apply for investment quotas on the interbank market, the PBOC said on Aug 17. Foreign institutions should also disclose funding sources and investing plans, it said.

(China Daily August 25, 2010)