The international market for offshore (ex-mainland China) offerings of debt securities denominated in Renminbi yuan, the currency of the People’s Republic of China, has had a record first half of 2014, with RMB130 billion (approximately US$21.1 billion, at an exchange rate of US$1.00 = RMB6.15) of such bonds being issued in Hong Kong during the first six months (RMB bonds, when cleared and settled through banking facilities in Hong Kong, are known colloquially as “dim sum bonds”, after the much-beloved form of Cantonese cuisine). In addition to this buoyant market, the period also saw the first-ever offerings by a non-financial institution of RMB bonds cleared and settled in Singapore, in offerings of an aggregate of RMB3.0 billion of bonds guaranteed by Hainan Airlines Co., Ltd., one of the PRC’s “Big Four” airlines. The offshore RMB market has been dominated by Hong Kong since the first dim sum bond was issued in 2007, but the Hainan Airlines offering, in conjunction with the PRC government’s ongoing efforts to set up additional RMB finance hubs in such cities as London, Frankfurt, Paris and Taipei (as well as Hong Kong and Singapore), may mark the next big step in the globalization of China’s currency.
History of RMB Bonds
The RMB bond market was initially developed to address the investment demand for RMB products in Hong Kong, as offshore and onshore RMB are not fully fungible, requiring PRC government approval for cross-border movements. After a period of initial growth, the RMB bond market has become one of the principal ways to offer attractive investment options to foreign (non-PRC) investors that wish to invest in RMB assets – or, more broadly, in China – but that are restricted by the PRC’s capital control regulations from investing onshore. According to sources, RMB bond issuance in Hong Kong amounted to RMB36 billion in 2010, RMB108 billion in 2011, RMB112 billion in 2012 and RMB117 billion in 2013.
Following the first dim sum bond of China Development Bank in 2007, the PRC Ministry of Finance issued the first government dim sum bond in September 2009. Prior to July 2010, only PRC or Hong Kong banks or government entities could issue dim sum bonds. After the PRC government started a deregulation process in 2010 to assist in developing an offshore RMB market and internationalizing the currency, the category of eligible issuers was expanded to include multinational companies and international financial institutions, which use RMB proceeds to invest in their operations in China and, increasingly, in offshore transactions. The first dim sum bonds offered by non-financial companies were issued by Hopewell Highway Infrastructure Ltd. and McDonald’s Corporation in the second half of 2010. Subsequently, a series of measures were introduced by various PRC authorities to promote wider use of RMB in cross-border transactions and support Hong Kong’s development as an offshore RMB business center.
In its earliest stages, the offshore RMB bond market met two core objectives for offshore investors: (1) it provided investment opportunities for holders of RMB in offshore accounts who were virtually desperate to find such opportunities, and (2) it offered investors the chance to participate in the anticipated appreciation of the Renminbi as China’s economic growth continued. Early dim sum bond offerings often incorporated low bond interest rates (e.g., below 1% in some cases), very limited covenants or restrictions on issuers in bond documents, an absence of credit enhancement measures and fairly limited transparency in disclosure documents.
By 2013, the dim sum market had cooled somewhat as currency appreciation prospects slowed or reversed, the sustainability of China’s economic growth looked more uncertain and other non-Renminbi investment options grew more attractive. In order to address these negative factors, the RMB bond market was compelled to evolve into a more mature market, redressing some of the prior issues by raising interest rates to levels more comparable to corporate bonds in other emerging markets, adding bondholder protections to documentation (including, in some cases, full high-yield bond covenant packages), utilizing credit enhancements such as standby letters of credit, and improving the quality of disclosure to investors. Very likely, this evolutionary change will prove highly beneficial to the offshore RMB market over the long term.
Despite continuing concerns over the strength of the Renminbi and China’s overall economic growth prospects, offshore RMB debt financing has rebounded strongly in 2014. International investors are clearly paying close attention to the development of the offshore RMB bond market.
RMB bond issuers have included sovereign and quasi-sovereign issuers, banks and financial institutions, PRC, Hong Kong and multinational corporations and PRC state-owned enterprises. In addition to Asia-headquartered businesses, Renminbi bond issuers have included such familiar names as Volkswagen, Caterpillar and Unilever. The central banks of a number of countries have also entered the RMB bond market as issuers.
Clearing and Settlement of RMB Bonds
On the whole, the offshore RMB market is still too small, and lacking in scalability, to attract the interest of the largest asset managers. The market’s investing audience comprises principally investors based in Asia, although with increasing supplies of Renminbi outside the PRC, both RMB investments and utilization of the RMB in transactions are projected to continue to increase offshore.
RMB bond financing requires coordination between a clearing and settlement system and a bank authorized by the PRC to handle offshore RMB transactions. In Hong Kong, the Central Moneymarkets Unit established by the Hong Kong Monetary Authority works with Bank of China (Hong Kong) Limited as the clearing bank for Renminbi transactions. Singapore, the first financial center outside the PRC to have a RMB clearing bank, has relied on the Singapore branch of Industrial and Commercial Bank of China, working in conjunction with The Central Depository (Pte) Limited, commencing with the RMB bond offering by Standard Chartered PLC in May 2013.
In June 2014, the PRC government designated China Construction Bank (London) Limited as the Renminbi clearing bank in London, enabling London to move into the offshore RMB bond market in the same fashion as Hong Kong and Singapore. Other jurisdictions, including Frankfurt, Paris and Luxembourg, are also moving forward to put in place, or further develop, Renminbi clearing.
Growth Drivers and Challenges
Further evolution and growth in the offshore RMB bond market may be linked to the following factors, among others:
- PRC government impetus. A dynamic offshore RMB bond market is a key aspect of the PRC government’s plan to internationalize the Renminbi. Offshore RMB supply has grown to RMB1.2 trillion, and the RMB became the world’s eighth most used currency for trade settlement by the end of 2013. The PRC government has permitted the PRC policy banks to issue RMB bonds in the offshore market to enhance market activity and help to build benchmark yield curves to improve the efficiency of the market.
- Bond issuer satisfaction. As noted, issuers were originally attracted to the RMB bond market due to the very tight interest rates, as investors focused on limited investment opportunities and expected returns from currency appreciation. Demand for investment products still outpaces supply, but interest rates on offshore RMB bonds have risen. As the market matures, it will be important that economic and non-economic terms of offshore RMB bond financings remain more attractive to borrowers than other available alternatives, in either the Renminbi or other currencies.
- Investor needs. Demand for offshore RMB products remains strong, so this key to continuing growth is fairly stable. In addition, as the average tenor of offshore RMB bonds is only two to three years, bonds come due and principal needs to be reinvested with greater frequency than in most bond markets. Positive projections on Renminbi appreciation and China’s overall growth would improve the situation further.
Challenges to maintaining and expanding the offshore Renminbi bond market, most of which were touched on above, include (a) the diminishing cost advantage of RMB bonds to issuers, paired with the more mixed prospects of Renminbi appreciation, (b) limited size and tenor of bonds, which act as a disincentive to issuers, but are necessitated by investor concerns about market stability and, again, currency appreciation prospects, (c) market liquidity, which has been limited due to the size and newness of the offshore RMB market, and (d) the increasing complexity – covenants, credit enhancements, disclosure – of offshore Renminbi debt capital markets transactions. Continued development of growth drivers, along with effective management of challenges, will likely have a highly visible effect on the growth of this market in the next few years.
Hainan Airlines’ Landmark Offering
However the RMB bond market develops, the May (RMB1.7 billion) and June (RMB1.3 billion) offerings by Hainan Airlines in the first half of this year were historic events. The two offerings (the bonds constitute a single series of securities), listed on the Singapore Stock Exchange and cleared and settled through CDP in Singapore, marked the first time that a corporate (non- financial) issuer had chosen Singapore clearing and settlement over the HKMA’s CMU system in Hong Kong, qualifying the offered securities as “lion city bonds” (in light of Singapore’s nickname of the Lion City) rather than dim sum bonds.
The differences between Hong Kong clearing and Singapore clearing of Renminbi bonds are virtually all more conceptual than practical, and investors are unlikely to notice any of these differences, any more than they are able to differentiate between London, Luxembourg or Singapore listings of their bonds. However, with Singapore’s step forward toward becoming a true offshore financing hub for China’s currency, the path to the Renminbi becoming a dominant international currency is further paved.
Hainan Airlines is a leading provider of air passenger, air cargo and airline-related services in China and abroad. Its shares are listed in the PRC’s domestic A share market, and also in China’s B share market for foreign investors, in each case on the Shanghai Stock Exchange. Cadwalader’s Hong Kong-based capital markets team represented Hainan Airlines in the 2014 lion city bond offerings, as it has on two prior dim sum bond offerings (RMB1 billion in 2011, and RMB500 million in 2012) and a US dollar bond offering (US$500 million, in 2013).