China's top goal: Making the yuan the standard

Offshore yuan-denominated bonds - a plank in China's drive to internationalize its currency - will speed up the economy's growth rate as an increasing number of financial institutions roll out yuan-denominated products in Hong Kong.

The World Bank has issued its first yuan-denominated bond in January in Hong Kong to raise 500 million yuan (52.6 million euros) from the two-year bond issue on Hong Kong's yuan-denominated bond market.

This move is symbolic because it will help China as it tries to increase the use of its currency in global markets.

The reason why the World Bank chose Hong Kong to issue yuan bonds is because the cost of funding there is ultra-cheap - hundreds of basis points lower than on the mainland.

The abundant liquidity and the comparatively lower interest rates in Hong Kong are two reasons for the World Bank to issue the yuan bond. The bonds enjoy a coupon of 0.95 percent on lending rates. This is even lower than the lending rate in November last year when the Ministry of Finance issued the yuan-denominated bonds in Hong Kong.

In December, VTB Bank, Russia's second-biggest bank, issued a three-year, yuan-denominated bonds in Hong Kong with the yield of 2.95 percent. In the same year, the bank issued a five-year, euro-dollar bonds with the lending rate of 6.47 percent. Although issuers will face risks due to the yuan's appreciation, if the World Bank fund is used in China, there won't be any risks.

After the global financial crisis, the Chinese government seems to fully understand the risks of an over-reliance on the dollar and has decided to build a new international financial strategy, which is to reform the international monetary system, the monetary cooperation in East Asia and internationalize of the yuan. Its internationalization has become the top priority of the new strategy.

The Chinese government has been seeking to internationalize the yuan in two ways. First, China is continuously exporting yuan, which involves encouraging enterprises to use the yuan in transactions. Despite the global success of Chinese exporters, the yuan plays only a minor international role because it cannot be freely exchanged for other currencies. And official controls make it difficult to move the yuan in and out of China. But in July 2009, China successfully ran a pilot program of cross-border trade using the yuan.

Total cross-border yuan transactions reached $70.6 billion (48.1 billion euros) in the first half of last year, 20 times the figure in the second half of 2009. The achievement was made after the central bank expanded a pilot project allowing Chinese and foreign companies to settle trade transactions in yuan since June 2010.

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