A growing number of foreign and Chinese companies are accessing the renminbi (“RMB”) bond market to fund projects, enhance liquidity and improve their working capital in China. These companies can raise capital while avoiding time-consuming IPOs, rights issuances and secondary offerings. It also offers a cheaper form of RMB financing to an issuer than that raised onshore1. An RMB bond offers investors (who have few options to invest in offshore RMB) exposure to RMB. The Hong Kong RMB bond market, also known as the Dim Sum bond market, is the first offshore2 market for Chinese currency investments and has increased significantly in the past few years. This eUpdate is part 1 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 and PRC Regulations
I. Financial Institutions
In 2007, the first RMB bonds were issued in Hong Kong after the publication in June 2007 of the “Interim Measures for the Administration of the Issuance of RMB Bonds in Hong Kong by Onshore Financial Institutions” by the National Development and Reform Committee (“NDRC”). These measures regulated the issuance of RMB bonds in Hong Kong by onshore financial institutions.
Prior to 2010, only PRC3 incorporated financial institutions were (after obtaining prior governmental approval) allowed to issue RMB bonds in Hong Kong and were required to remit the proceeds from such issues to the PRC. In 2010, the Chinese government extended the class of RMB bond issuers to include multinational companies and international financial institutions. The Hong Kong Monetary Authority (“HKMA”) deregulated cross-border settlements in RMB between Hong Kong and the PRC and further extended the class of issuers of RMB bonds under the “Elucidation of Supervisory Principles and Operational Arrangements Regarding Renminbi Business in Hong Kong." The HKMA relaxed its 10 per cent limit on net open positions for RMB, removing restrictions on foreign exchange swap trading. These relaxations enhanced liquidity in the offshore RMB swap and bond markets.
Prior to 2011, remittance of RMB bond proceeds by non-PRC incorporated issuers from Hong Kong to mainland China4 was granted on a discretionary basis. In 2011, the People’s Bank of China and Ministry of Commerce issued new rules which simplified remittance by non-PRC incorporated issuers of RMB bond proceeds to mainland China.
II. Non-Financial Institutions
On May 2, 2012, NDRC published the “Circular on the Matters relating to the Issuance of RMB Bonds in Hong Kong by Onshore Non-Financial Institutions." Prior to the publication of the NDRC Circular, approvals for onshore PRC non-financial institutions to issue RMB bonds in Hong Kong were granted on a discretionary basis. The NDRC Circular formalized the approval process and stipulated the regulatory framework for onshore PRC non-financial institutions to issue RMB bonds in Hong Kong.
The approval process depends on the type of non-financial institution. An issuer which is supervised by the central PRC government can submit the application directly to the NDRC for approval. A local issuer is required to submit the application for examination and approval by the provincial branch of the NDRC, which in turn submits the application to the NDRC for final approval. The NDRC then decides whether to grant approval within 60 working days of accepting the application. Once the approval is granted, the issuer is required to initiate the bond issuance process within 60 working days from the date of the approval. The NDRC approval is valid for one year during which period the RMB bond issuance must be completed.
An issuer of an RMB bond in Hong Kong must:
- have acceptable corporate governance and creditability;
- have relatively strong profitability;
- use the proceeds obtained from the RMB bond issuance mainly for fixed asset investment projects which comply with the PRC’s national macroeconomic policies, industrial policies, foreign investment and outbound investment policies and fixed asset investment administrative rules;
- not have outstanding corporate bonds or other debts in default and not have outstanding payments of interest or principal; and
- have a three-year compliance track record, with no material violation of any laws or regulations.
RMB Bond vs. Synthetic Bond
Two debt instruments are known as RMB bonds:
- an RMB bond which is settled in RMB; and
- a synthetic bond which is settled in other currencies.
An RMB bond and a synthetic bond differ in their payment conditions. With an RMB bond, principal and interest payments are made in RMB. However, with an RMB synthetic bond, an issuer is allowed to make payments in a currency other than the RMB (usually U.S. dollars) in case it has difficulty sourcing RMB.
The Hong Kong and PRC regulations relevant to an RMB bond are discussed under “Hong Kong and PRC Regulations” above.
RMB Bond Offering Structures
There are two methods of offering RMB bonds in Hong Kong:
- a retail offering where the bonds are offered to the public. The issuer prepares a prospectus which is registered with the Hong Kong Registrar of Companies to permit the bonds to be offered to the public. To date, this route has been used by major PRC banks with broad name recognition with the public;
- an institutional placing solely with institutional investors in Hong Kong and internationally. An institutional placing relies on exemptions from the need to prepare and file a prospectus and is the common route for corporate issuers to raise funds.
Bonds are issued in uncertificated form and represented by a global bond which is held in the Central Money Markets Unit Services (“CMU”) operated by the Hong Kong Monetary Authority (“HKMA”). The global bond is deposited for safekeeping with a sub-custodian for the CMU nominated by HKMA, as the CMU operator. This enables bondholders to hold the bonds and trade by electronic book-entry rather than physical settlement.
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 “PRC” in this article refers to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan.
4 “Mainland China” in this article refers to the geopolitical area under the jurisdiction of the PRC, excluding Hong Kong, Macau and Taiwan.