Foreign and Chinese companies seeking to access the renminbi (“RMB”) bond market can now raise capital without time-consuming IPOs, rights issuances and secondary offerings. It also provides a cheaper form of RMB financing to an issuer than raising capital onshore1. An RMB bond provides investors (who otherwise have very few options to invest in offshore RMB) with RMB exposure. The Hong Kong RMB bond market, also known as the Dim Sum bond market, is the first offshore2 market for investments in the Chinese currency, but it has seen slow growth in the past few years. This eUpdate is part 5 in a series of eUpdates on this topic. Part 1 deals with laws and regulations applicable to, and features of, an RMB bond. Part 2 discusses points that an RMB bond issuer should consider. Part 3 deals with the documentation and issue process of an RMB bond. Part 4 considers some structural issues that the Dim Sum bond market continues to face after its liberalization in 2010. Part 5 considers the competition and challenges posed by other offshore RMB markets to Hong Kong as the major offshore RMB business center.
Hong Kong as the major offshore RMB business center
Since 20103, Mainland China4 began a series of deregulation which served to boost the use of its currency overseas5; the Chinese government then extended the class of Dim Sum bond issuers to include multinational companies and international financial institutions6. In 2011, China’s 12th Five-Year Plan promulgated the policy of promoting wider use of RMB in cross-border transactions and supporting Hong Kong’s development as an offshore RMB business center7. As of August 31, 2013, 39% of RMB-denominated bonds were listed on the Hong Kong Stock Exchange (“HKEX”)8, indeed the leading offshore RMB business center. On November 1, 2013, the Canadian province of British Columbia raised RMB 2.5 billion – the first government other than China to tap the offshore RMB market9. Until then, it has been mostly corporations operating in Mainland China, such as BP, which were interested in financing their RMB investments, even only in part, through the Hong Kong Dim Sum bond issues10.
Rise of other offshore centers
As a result of the RMB’s internationalization, overseas markets began to emerge.
In Asia, Singapore emerged as an offshore hub for the RMB. Singapore Exchange (“SGX”) was the first in the world to offer clearing of over-the-counter foreign exchange forwards for RMB11. SGX launched depository services for RMB bonds on May 27, 2013, supporting Singapore’s development as an offshore RMB hub12. Around the same time, Standard Chartered PLC successfully raised RMB 1 billion through a Dim Sum bond listed on the SGX13. It was the first Dim Sum bond which was listed, cleared and settled in Singapore, and the order book was over three times subscribed with significant demand from some of the largest institutional investors in the region14. On November 29, 2013, the SGX welcomed the first RMB bond to be listed and cleared in Singapore by a Chinese bank (the Singaporean branch of Industrial and Commercial Bank of China (“ICBC”)). The bond issue was for RMB 2 billion on a two-year tenor. According to the book runners, Singapore investors took up 55% of the bond issue15.
The Luxembourg Stock Exchange (“LuxSE”) is the dominant European offshore financial center for RMB. The country enjoyed a longstanding relationship with Mainland China, including strong economic ties16. The LuxSE signed a Memorandum of Understanding with the HKEX in 2001 and another with the Shanghai Stock Exchange in 200617. It became the first European exchange to list a Dim Sum bond in 201118. Two of the largest Chinese banks, ICBC and Bank of China (“BOC”), have their European headquarters in Luxembourg19. China Construction Bank (“CCB”) also chose Luxembourg as its European base and opened a subsidiary20 in October 201321. CCB’s spokesperson said that “the CCB was attracted by Luxembourg’s good location, its good financial environment, the effective government, the prudent supervision and an open attitude towards the Chinese banking sector22." He noted that “the speed with which the CCB acquired authorization from the Luxembourg Government was the fastest since the beginning of the internationalization of CCB businesses23." On January 14, 2014, the Canadian province of British Columbia (further to its recent Dim Sum bond issue in Hong Kong) raised RMB 2.5 billion on the LuxSE24. As of January 20, 2014, there were 41 Dim Sum bonds listings in LuxSE from 29 international issuers25.
Albeit a newcomer to the RMB party since merely two years ago26, and despite its relatively small share of the Dim Sum bond market at present, London is catching up. Spot RMB foreign exchange volumes almost doubled in the first half of 2013 over the same period in 2012, hitting a daily value of US$4.8 billion27. Total trade finance denominated in RMB amounted to RMB 27.9 billion in the first half of 2013: more than double the amount over the same period in the previous year28. The rate of growth shows increasing desire for global companies to adopt RMB in international trade29.
In October 2013, Beijing gave investors based in Britain the right to buy up to RMB 80 billion of stocks, bonds and money market instruments in Mainland China, putting London ahead in the race to become the main offshore hub, alongside Hong Kong, for trading in Mainland China’s currency and bonds30. George Osborne, Chancellor of the Exchequer announced in October 2013 measures intended to strengthen financial ties between the UK and Mainland China31. The two countries agreed to allow direct RMB-GBP trading in Shanghai and offshore, making the pound the fourth currency to trade directly against the RMB32, while Chinese banks would be accorded special treatment to draw them to London33. Prior to this, Chinese banks were put off by a regulatory drive towards subsidiary structures with their own capital and funding requirements in London. Luxembourg was the preferred base for these banks34.
ICBC issued a RMB 2 billion bond in London (the “ICBC London Bond”) in November 201335. This, according to George Osborne, would be the first mainland-headquartered Chinese bank to sell Dim Sum bonds in London36.The bond was comprised of two tranches: a three-year portion and a five-year portion37. In January 2014, the London branch of BOC raised RMB 2.5 billion38. The bond (the “BOC London Bond”) was the first issue from the London branch of a Chinese bank to the Dim Sum bond market39. It was the fourth Dim Sum bond to be issued in London. European investors took up 40% of the deal, the largest proportion from the region in offshore RMB issues so far40. It reflected increasing confidence and comfort with which Europeans are now dealing with offshore RMB issues. It was described as “a landmark bond issue, underscoring the city’s potential as a hub of yuan fundraising for European debt issuers and posing a threat to Hong Kong41." Indeed, many Western bond issuers, especially European ones, may prefer London for its time-zone advantage, strong regulatory framework and global foreign exchange volumes42. Moreover, as the world’s biggest center for foreign exchange trading43, there is a high concentration of banks in London44.
Challenges to Hong Kong
According to data from Bloomberg as of August 31, 2013, 39% of RMB-denominated bonds were listed on HKEX, 29% on SGX, 21% on LuxSE, 4% on London Stock Exchange and 7% on other exchanges45. These figures clearly did not take the recent deals into account, including the few that we have mentioned above, but gave a rough picture of the distribution of the “pie” (or dim sum!) of the four largest offshore RMB centers around the globe. Following Mainland China’s policy to internationalize and “open up” the RMB, thereby enabling it to be used as widely as possible, Hong Kong is in the danger of seeing its market share in the Dim Sum bond market fall from the current height46.
Take Singapore as an example. In addition to its sound financial infrastructure and economic ties, Singapore has been increasingly keen on drawing on its deep and liquid capital markets as it cements itself as a regional hub for RMB financing needs47.
Some may argue that it would be difficult for European exchanges to “snatch” deals from Hong Kong, as the bulk of subscribers of RMB debts are still based in Asia48. In 2013, over 70% of Dim Sum bond issuers are from Mainland China and Hong Kong49. However, Asian investors do not have a problem with tapping into other markets for Dim Sum bonds: the majority of the ICBC London Bond – 70% of the three-year bond and 65% for a five-year issue – was sold in Asia50; Asian investors took up 60% of the BOC London Bond51; etc. BOC said that it was planning more issues52. A senior capital financing officer at the HSBC envisaged that Dim Sum bonds in London would grow into a similar size per deal as the RMB three to four billion transactions being executed in Asia53.
However, “London has two challenges in developing its offshore RMB business. One is that the city doesn’t have a local clearing bank, though talks on this have started. Also, it will take time to educate local investors. If you talk to EU investors about RMB products, you’ll see that some are still not that familiar with this asset class54.” For Luxembourg, there is no quota for Chinese investment55 similar to the RMB 80 billion quota granted to the United Kingdom last year.
The head of RMB trading settlement at a European bank said that the internationalization of the RMB beyond Hong Kong was designed not to have cities competing but to ensure companies were comfortable trading in RMB56. Hong Kong itself may also benefit from the rise of financial rivals57. “The pie gets bigger, and that would open tremendous interest for the Chinese currency… Every city, whether it is London or Luxembourg, has its unique strengths, and that will promote the internationalization of the currency58.” That may be easier said than done: to maintain its leading position, Hong Kong will need to introduce more measures to make sure that its strengths remain unique.