MNI EXCLUSIVE: China May Hone Yuan Management Via Bill Sales

     BEIJING (MNI) - The People's Bank of China could increase issuance of

offshore bills as well as further diversify their maturities in order to better

manage the offshore forex market, promote internationalisation of the yuan and

guide offshore interest rates, former PBOC officials and government advisors

told MNI.

     Sheng Songcheng, former director of the People's Bank of China's statistics

department, said that a greater variety of maturities and more issuance would

transform the bills into a regular tool for the PBOC as it seeks to adjust

offshore liquidity.

     The PBOC introduced the Hong Kong-traded bills in November last year when

the offshore yuan broke above 6.9 to the U.S. dollar and headed for the key 7

level. Some CNY80 billion are currently outstanding, after total sales of CNY160

billion in seven auctions. The PBOC last sold three-month bills at 2.9%,

six-month bills at 2.89% and one-year securities at 2.9%.

     Zhang Bin, head of global macroeconomic research at Institute of World

Economics and Politics at the Chinese Academy of Social Sciences, agreed that

the bills enhanced the PBOC's ability to affect the exchange rate, even if they

would not constitute its primary forex tool.

     The bills would boost the offshore supply of liquid highly-rated

yuan-denominated securities, Zhang added, although he noted bill auctions would

have to be of significant size to influence rates.

     --LIQUIDITY ADJUSTMENT

     The offshore yuan has strengthened steadily since early September, nearing

7 to the dollar after trading at 7.18. Guan Tao, a former director of

international payments at China's State Administration of Foreign Exchange, said

this was largely due to improved sentiment in trade talks with the U.S. and a

generally weaker dollar, rather than bill sales.

     Auctions have continued even when there is little need to support the

currency, as the PBOC rolls over maturing issues, Guan said.

     The decline in issuance of yuan-denominated offshore Dim Sum bonds since a

2015 peak has left a gap in the market for the PBOC bills, which could help to

define the shorter-end of the offshore yuan yield curve, he said.

     Hong Kong remains the world's largest offshore yuan clearing centre, and

the former PBOC officials said protests in the territory should not affect bill

operations. Guan told MNI the yuan had been little impacted by the unrest,

although he added that bills might be insufficient as a tool to address any

weakness that might arise from such events.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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