Bank of China (BOC), the mainland's second-largest lender, said yesterday that it plans to issue up to 3 billion yuan of bonds in Hong Kong.

The bank will be among the first batch of mainland banks to issue yuan-denominated bonds in Hong Kong, after the central government gave mainland financial institutions the green light in January.

"It's a milestone," said Ricky Cheung, vice-president of Enlighten Securities and Futures. "The yuan bond issue will mark another opening up in the yuan business in Hong Kong."

He added: "More State-owned lenders will come out to issue yuan-denominated debts."

Late last month, China Construction Bank (CCB) said it would issue 5 billion yuan worth of subordinated bonds in Hong Kong, out of a possible issue of up to 40 billion yuan.

CCB, however, gave no timetable and said the bond issue plan is pending shareholder and regulatory approval.

Market sources said the Industrial and Commercial Bank of China, the Export-Import Bank of China and China Development Bank are considering selling yuan-denominated bonds in Hong Kong.

Market analysts expect the first yuan bond sale would take place in the third quarter.

"It's a nice investment as you get the pick-up on the currency appreciation," said Wu Yonggang, an analyst at Guotai Jun'an Securities.

"It will spur the development of the yuan bond market and expand the scope of yuan-denominated financial services in Hong Kong," he said.

The central government and Hong Kong officials had expected the deregulation to reinforce Hong Kong's standing as a financial center and to force international levels of transparency on mainland bond sellers.

For mainland banks, selling yuan-denominated bonds in Hong Kong offers them a diversified fund-raising channel apart from listing and retail banking, Wu said.

Casor Pang, a strategist with Sung Hung Kai Financial Group, said the move would help ease the excessive liquidity on the mainland.

"It seems the central government is eager to cope with liquidity issue. And we expect more State-owned lenders to follow suit," he said.

But due to a small amount of yuan-denominated deposits in Hong Kong banks, there may not be much incentive for domestic lenders, some analysts said.

Official statistics show there were about 23 billion yuan renminbi deposits by the end of last year.

BOC's proposed bond sale is subject to shareholder approval at the bank's annual general meeting on June 14, the bank said in a statement to the Shanghai Stock Exchange.

The bonds will have a maturity of up to three years, the bank said. The interest rate will be determined by the level of the renminbi deposit rate on the mainland and Hong Kong, as well as the level of bond yield in relevant bond markets.

(China Daily May 29, 2007)