City looks to boost increasing role as nation's offshore settlement center

BEIJING - Yuan-denominated initial public offerings (IPO) are expected to be launched in Hong Kong this year for the first time as the city attempts to boost its role as the offshore yuan settlement center.

Hong Kong's stock exchange and the securities regulator are preparing for the launch of yuan-denominated IPOs and are hopeful that the good news will come this year, said Chan Ka-keung, Secretary for Financial Services and the Treasury Bureau of Hong Kong, on Monday without giving a specific timetable.

The plan to issue yuan-denominated stocks is seen as the latest move to expand the use of the currency in Hong Kong and to meet the growing demand for the equity products as the city has seen a rapid buildup of deposits in the currency.

Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd, said in January that the exchange would soon set up a liquidity pool to allow investors to buy equity products denominated in the currency.

But the issue of liquidity remains a major challenge to the development of Hong Kong's offshore yuan market, as the amount that can be exchanged daily by individuals there is only equivalent to around $3,000.

Chan said that yuan-denominated stocks could face huge constraints because of a lack of adequate yuan liquidity in the market. However, the local authorities are seeking to widen the liquidity pool with mainland banks to facilitate yuan-denominated trading.

Hong Kong's stock exchange was reportedly in talks with the yuan clearing bank Bank of China Hong Kong (Holdings) Ltd to set up a liquidity pool, which would enable investors without yuan holdings to buy stocks denominated in the Chinese currency.

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Li Ka-shing, Hong Kong's richest man, may issue the first yuan-denominated IPO this year in the city with the sale of more than 10 billion yuan ($1.5 billion) of shares in a real estate investment trust.

Analysts said that the launch of the stocks would make the Hong Kong market more diversified and help to maintain its competitiveness in the IPO market.

With China's capital account largely closed, Hong Kong has acted as an offshore intermediary market for yuan trading.

The promotion of the yuan market in Hong Kong is also part of Beijing's efforts to internationalize its currency, which has become increasingly attractive as investors bet on its continued appreciation.

The central government's plan to encourage settlement of cross-border trades in the currency has further fueled the growth of yuan deposits in Hong Kong, which surged 12.6 percent in December to 314.9 billion yuan, according to the Hong Kong Monetary Authority.

Analysts expected the city's total deposits in the currency to exceed 500 billion yuan in the first half of this year.

Hong Kong has launched yuan-denominated bonds and funds in order to expand the yuan business and to widen the investment channels of the Chinese currency.