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Asia-PacificFebruary 16 2011

Investors savour Chinese dim sum bond market

China is using the Hong Kong-based 'dim sum' market to develop its offshore renminbi bond sector and push the local currency onto the international stage. There is a huge pool of liquidity keen to invest and although it must face the typical hurdles of any nascent market, the signs are good
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As it tries to wean itself off the dollar, China sees its offshore bond market as a key tool in promoting the renminbi as an international currency.

Hong Kong has become the natural conduit for the developing market as issuers from the Chinese government to US multinationals take advantage of the city’s enormous Chinese-currency deposit base and mature infrastructure.

“There are large pools of deposits in Hong Kong looking for higher-yielding investments," says Henrik Raber, global head of debt capital markets at Standard Chartered. “That’s also good news for borrowers because it means they can issue more cheaply than onshore.”

Paving the way

The catalyst for the market’s growth was the Chinese government’s decision in 2009 to allow renminbi-denominated trade settlement in Hong Kong – a step toward building liquidity that was followed last year by the introduction of investment products to be denominated in CNH, the currency code for the offshore renminbi market.

As banks scrambled to launch swaps and CNH-linked notes, renminbi deposits in Hong Kong rose fivefold in 2010 to Rmb300bn ($45bn), according to the Hong Kong Monetary Authority. With investors desperate to bet on the currency’s appreciation, it was not long before a string of companies lined up to issue CNH-denominated bonds.

Hopewell Highways Infrastructure led the charge, selling the inaugural 'dim sum' bond last July. In August, McDonald’s became the first multinational to sell a CNH bond, paving the way for a wave of deals from firms including US manufacturer Caterpillar and Macau casino operator Galaxy Entertainment.

Corporates are conspicuous issuers but the biggest players are the Chinese government’s ministry of finance, China Development Bank and Export-Import Bank of China. Notable among international financial institutions is the World Bank, which issued its first renminbi-denominated bond in January.

While direct comparisons are difficult, high demand means that dim sum issuers save about 200 basis points by issuing in Hong Kong rather than mainland China. Dim sum bonds pay an average yield of about 1.83%, according to Hong Kong’s Treasury Markets Association, while the average yield on three- to five-year bonds sold by government-linked companies in China is 3.8%, according to data from Bank of America Merrill Lynch.

Chinese-currency issuance is also substantially cheaper than dollar issuance, with the average yield on CNH debt hovering around 2% – or less than 50% of that on Chinese companies’ dollar-denominated bonds, according to Bloomberg and JPMorgan.

Teething trouble

Of course, dim sum bonds still make up a tiny proportion of China's total local-currency debt. The amount outstanding is currently about Rmb60bn, compared with Rmb20,000bn of local-currency bonds in the mainland market at the end of September, according to the Asian Development bank.

The crucial difference is that foreign investors, who are restricted from buying domestic bonds, are welcome to invest in the Hong Kong market. Such has been the level of demand from international investors that reports of reverse inquiries are common, with funds asking corporates whether they might consider issuing fixed-income securities.

One drawback for issuers is that repatriation of funds raised in the dim sum market is severely restricted as it is paramount for China to keep a close eye on its capital account.

“Getting approval is not easy and needs to be done at a provincial level, which means that if you operate in four provinces, you need four approvals,” says Dominique Gribot-Carroz, vice-president at Moody’s Investors Service in Hong Kong. “You also need to show proof of where the money is spent.”

Only about a quarter of those that apply are granted approval to remit funds in China, according to some estimates, and even then it can take up to four months to be granted.

One way for issuers to sidestep the remittance dilemma is to attempt to swap CNH proceeds into other currencies, such as euros or dollars. Still, the swap market is relatively immature and does not offer prices in longer maturities.

“It’s cheaper to issue in yuan but the cross-currency swap market is very immature and not at all transparent,” says Rob Reilly, co-head of flow fixed income and currencies for Asia at Société Générale CIB in Hong Kong. “There is a reasonable short-term market but it needs to develop because the lack of options is definitely holding back issuance.”

Synthetic solution

A partial solution to remittance and swap challenges has been the development of the so-called synthetic market, comprising offshore bonds denominated in renminbi but settled in dollars.

The synthetic market is young (last year saw one deal compared with 33 dim sums) but in recent weeks has proved popular with mainland Chinese property firms, which are under pressure on remittances as the government works to cool the economy.

By issuing synthetics, property firms can remit dollar proceeds in about a month and with minimal bureaucracy, and investor appetite for currency exposure means cheaper funding than through straight dollar-denominated issuance.

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