RMB Bond Issue in Hong Kong (a.k.a. A Delicious Dim Sum Offering!) – Challenges to Hong Kong – Part 5

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.

Singapore

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.

Luxembourg

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.

London

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.

^{1   “Onshore” in this article refers to the jurisdiction of the PRC.
2   “Offshore” in this article refers to the other jurisdiction areas of the PRC, in particular, Hong Kong.
3   For more information on PRC Regulations (especially those prior to 2010), see RMB Bond Issue in Hong Kong (a.k.a. A Delicious Dim Sum Offering!) - Part 1 (http://www.dorsey.com/eu_hk_rmb_bond_issue_pt1), May 9, 2013.
4   “Mainland China” in this article refers to the geopolitical area under the jurisdiction of the PRC, excluding Hong Kong, Macau and Taiwan.
“PRC” in this article refers to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan.
5   “Easing of rules on dim sum bonds urged”, Bloomberg, December 13, 2013.
6   See RMB Bond Issue in Hong Kong (a.k.a. A Delicious Dim Sum Offering!) - Part 1, ibid.
7   http://www.hkma.gov.hk/eng/key-information/insight/20130221.shtml
8   According to data from Bloomberg. See “Listing Dim Sum bonds in Luxembourg”, Luxembourg Stock Exchange, November 2013.
9   “Dim Sum Busiest in 17 Months as BlackRock Bullish: China Credit” by Fion Li, Bloomberg, December 3, 2013.
10  “Hong Kong ‘Dim Sum’ Bond Market Becoming Market of Choice” by Hans Parisis, Moneynews, November 5, 2013.
11  News & Updates, Singapore Exchange, May 27, 2013. (http://www.sgx.com/wps/wcm/connect/sgx_en/home/higlights/news_releases/sgx+launches+depository+services+for
+rmb+bonds)
12  Ibid.
13  https://www.sc.com/en/news-and-media/news/asia/2013.05.28-sc-singapore-CNY-bond-successfully-closed.html
14  Ibid.
15  News Release, Singapore Exchange, November 29, 2013. (http://www.sgx.com/wps/wcm/connect/sgx_en/home/higlights/news_releases/SGX+welcomes+first+Chinese+Banks
+RMB+bond+listed+and+cleared+in+Singapore)
16  “Listing Dim Sum bonds in Luxembourg”, Luxembourg Stock Exchange, November 2013.
17  See http://www.rmb-business.com/rmb-in-luxembourg/dim-sum-bonds.
18  See footnote 16.
19  “Luxembourg, the main international RMB centre in the Eurozone”, Luxembourg for Finance, June 18, 2013.
20  “London to dominate Rmb? Not so fast, says Luxembourg” by Simon Rabinovitch and James Fontanella-Khan, Financial Times, October 31, 2013.
21  “Opening of China Construction Bank’s European headquarters spurs Luxembourg’s yuan hub hopes”, Reuters in Luxembourg, October 30, 2013.
22  See http://www.luxembourgforbusiness.lu/en/news-benchmarks/china-construction-bank-opens-branch-office-luxembourg, November 4, 2013.
23  Ibid.
24  “Securities denominated in CNY listed on the Luxembourg Stock Exchange (as of 20/1/2014)”, Luxembourg Stock Exchange.
25  See footnote 17.
26  HSBC was the first to issue RMB bonds in London in April 2012 (see http://www.hsbc.com/news-and-insight/2013/fast-facts-offshore-rmb-market). On November 29, 2012, CCB announced the successful issuance of its first offshore Dim Sum bonds in London; CCB, therefore, is the first Chinese financial institution to launch Dim Sum bonds in London and list Dim Sum bonds on the London Stock Exchange (See www.uk.ccb.com/london/en/ggxx/201311251385343383.html).
27  According to the City of London Corporation.
28  “CNH Tracker – Trade, not deposits, may be London’s calling” by Michelle Chen, Reuters, January 23, 2014.
29  Ibid.
30  See footnote 21.
31  “London wins first offshore renminbi issue” by Christopher Thompson, Financial Times, November 12, 2013.
32  See footnote 31.
33  See footnote 20.
34  See footnote 31.
35  See footnote 31.
36  “ICBC Dishes out ‘London’ Dim Sum Bonds to Asia” by Ben Edwards, Wall Street Journal, November 14, 2013.
37  See footnote 31.
38  “Dim Sum market makes healthy start to 2014” by Jing Song, FinanceAsia, January 10, 2014.
39  See footnote 31.
40  See footnote 38.
41  “London challenges Hong Kong with BOC’s yuan bond” by Jeanny Yu, SCMP, January 9, 2014.
42  See footnote 41.
43  See footnote 20.
44  See footnote 31.
45  See footnote 16.
46  See footnote 41.
47  See footnote 41.
48  See footnote 41.
49  See presentation by Frances Cheung of Crédit Agricole Corporate & Investment Bank on Offshore RMB.
50  See footnote 36.
51  See footnote 38.
52  According to Yan Wang, assistant general manager at Bank of China London. See footnote 53.
53  “Record dim sum bond issue for London” by Christopher Thompson, Financial Times, January 10, 2014.
54  According to Crystal Zhao, a Hong Kong-based fixed-income analyst at the HSBC. See footnote 41.
55  See footnote 21.
56  See footnote 21.
57  According to Andrew Main, managing partner at London-based fund management firm Stratton Street Capital. See footnote 21.
58  According to Andrew Main, managing partner at London-based fund management firm Stratton Street Capital. See footnote 21.}