The yuan-denominated bonds, issued by the Ministry of Finance, would mark the first time Beijing has directly offered the notes outside the mainland - a move by the central government to help build Hong Kong as its premier overseas yuan trading center.

"The MOF's move to issue sovereign debt in Hong Kong will surely stimulate the creation of a more vibrant secondary bond market in the territory," said Chen Xindong, a Beijing-based chief China economist at BNP Paribas Securities.

ADVERTISEMENT

The sovereign debt issues, rumored to total as much as 100 billion yuan (HK$113.5 billion) to be offered in several stages, could also boost yuan convertibility and allow companies one day to issue stocks locally in either Hong Kong dollars or the Chinese currency, Chen said.

"In other words it means the yuan's capital account could be freely floated, initially into Hong Kong dollars, paving its way to being a fully convertible currency in the long run," the economist said.

BOC (Hong Kong) (2388) has been designated as the clearing bank for the issue, which is expected to be distributed by most local banks.

Details of the MOF issue size, coupon and maturity have yet to be announced. "It would be a big gift from Beijing to Hong Kong as the [October 1] National Day approaches," one source added.

The MOF issue will mark the third step Beijing has taken this year to turn Hong Kong into a yuan bond trading center.

In March it allowed mainland units of Hong Kong banks to issue yuan bonds. Later, on June 29, the People's Bank of China signed an agreement with the Hong Kong Monetary Authority allowing firms on both sides of the border to settle their trade in yuan.

Since then, HSBC (0005) and Bank of East Asia (0023) have issued up to a combined 6 billion yuan of bonds in the city.

The June agreement also allows Hong Kong lenders to run trade finance business for mainland firms. "Beijing always wants to accelerate the development of Hong Kong as the regional bond center," said a mainland-based source. "Issuing sovereign government debt in Hong Kong would be a key gesture of support."

Discussions on the MOF bond issue started earlier this year, even before the National People's Congress and Chinese People's Political and Consultative Conference sessions in March, sources said.