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BOC launches RMB bond trading index

The capital markets team at Magic Circle firm Linklaters has bagged four bond issue mandates from Chinese banks as the Asian powerhouse’s president, Xi Jinping, makes his first state visit to the UK. Issuance in offshore yuan markets dried up as traders priced the currency at a sharp discount.

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“It will help to slow capital outflows and win back confidence of global investors”, he said.

The note is worth 5 billion yuan (786 million USA dollars), with an interest rate of 3.1 percent, and falls due in 2016, the central bank said in an online statement. The move also paves the way for the yuan’s internationalization.

The report said that Xiaohui Zhang, assistant governor of the People’s Bank of China; Bo Li, director-general of PBOC’s Monetary Policy Department; Chris Salmon, an executive director of the Bank of England; and Mark Boleat, chief of policy for the City of London, are expected to attend the event. On Wednesday morning, the yuan was at about 6.343 to the dollar.

That was an improvement from previous assessments, which described the yuan as “significantly undervalued”. The offshore yuan reacted more noticably to the weak data, to trade at 6.3795 per dollar, 0.32 per cent weaker than the onshore spot rate. It said South Korea also needs to be more transparent in telling financial markets when it was intervening.

Convertibility is the central condition for inclusion in the basket of currencies used to value the worldwide Monetary Fund’s Special Drawing Rights, a virtual currency that defines the value of IMF reserves and its emergency payouts to members.

Being in the SDR basket “can stimulate more demand for the yuan and thus boost its value”, said Liu Dongliang, a currency strategist at China Merchant Bank in Shenzhen.

Among the steps China has taken toward gaining inclusion in the SDR was its decision in August to begin reporting its currency reserves to the Fund. The amount is five times more than the average in the first seven months, PBOC data show.

Major Chinese banks borrowed dollars in the onshore swap market in late August and September, and then undertook “heavy dollar selling” in the spot market, said Frank Zhang, head of foreign-exchange trading at Shenzhen-based China Merchants Bank.

Bank of China gave no details on the size of the investment in the new yuan trading centre, saying only that it would be the bank’s second largest offshore trading centre after Hong Kong.

And the weakening economy is a cause for concern.

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American manufacturing companies complain that China is still manipulating its currency to gain trade advantages and their supporters in Congress have pushed the administration to take a tougher stand. They are closely watching to see what type of guarantees the administration was able to negotiate in the recently completed 12-nation Trans-Pacific Partnership trade agreement.

Yuan Set to Become a “Reserve Currency?”