The liberalisation of Chinese capital markets continues apace as HSBC becomes one of the first foreign banks to issue onshore bonds in China. 

It was a momentous 2015 for the renminbi, as China continued its efforts to internationalise the currency. The gradual liberalisation of Chinese debt capital markets (DCM) has been an integral part of the process, and HSBC – which says no other (non-Chinese) bank has its renminbi focus – has generally been where the action is.

That said, the bond market is only now returning to room temperature after a period in the chill cabinet. After Chinese equities took off like a heat-seeking missile in mid-2014, bonds fell out of favour with issuers. When the equity markets subsequently crashed to earth, then stabilised in mid-2015, it looked as if bond issuance would resume, but then the authorities devalued the renminbi.

That rocked the offshore renminbi (or 'dim sum') bond market, centred on Hong Kong, as foreign investors cashed out. More fundamental changes were afoot, however. The authorities have made the setting of the currency's daily trading bands more market sensitive, and scrapped the cap on deposit rates. In a symbolically important move that acknowledges such reforms, the International Monetary Fund has now included the renminbi in its Special Drawing Rights basket.

Quick to move

Earlier in 2015, China opened up previously limited access to the interbank bond market for foreign central banks, supranationals and sovereign wealth funds. (The huge interbank market, where more than 90% of onshore bonds are issued and traded, is already the third largest in the world.) That development was followed by the re-opening of the Panda market, in which non-mainland entities are permitted to issue onshore renminbi-denominated bonds 

“One of the most exciting phases in the development of Asia’s capital markets has been the opening of the onshore renminbi bond market [for financial institutions] in the past few months,” says Alexi Chan, HSBC’s Hong Kong-based global co-head of DCM. HSBC was intimately associated with this milestone, when its Hong Kong-based subsidiary became one of the first two foreign banks to issue bonds onshore in China. The other was an offshore unit of the Bank of China, which is regarded as a foreign bank.

Once approval had been granted by the People's Bank of China (PBOC), HSBC came to market at the end of September with its own Rmb1bn ($154m) three-year deal. "We had been eagerly awaiting the opening up of the onshore market to foreign issuers (other than supranationals)," says Tim Yip, HSBC's head of cross-border renminbi DCM. "Documentation for the transaction was prepared in simplified Chinese and governed by [Chinese] law, and the issue had an AAA local rating."

The transaction was aimed at eligible investors in the interbank bond market, with official price guidance of 3.5% to 4.5%. After orders worth more than Rmb2bn flowed in, this was finally set at 3.5%. That represented a modest pick up over the China Development Bank curve, which is the pricing benchmark for onshore financial issuance. HSBC's local subsidiary was one of three joint lead underwriters, the first time a foreign-owned bank has been allowed to play this role, and that of joint bookrunner, for an onshore issue.

Logical step

The hope is that this means the opening up of an alternative source of funding for global borrowers, a logical next step for multinationals that have already dipped their toes in the offshore renminbi market. At the same time, it would offer new opportunities to Chinese investors.

"The next landmark may be panda bonds from sovereign issuers," says Chris Jones, HSBC's global head of local currency debt syndicate. British Columbia has signalled its interest and, as this issue went to press, South Korea had announced official price guidance for what would be a Rmb3bn three-year Panda issue. HSBC was one of six joint lead underwriters.

Some are now predicting that the Panda market will rapidly eclipse dim sum issuance. Certainly, it has not escaped issuers' notice that onshore interest rates, having fallen steadily, are now lower than rates in the offshore market. "With continued market expectations of further easing, there is the potential for onshore renminbi interest rates to fall below those of other major currencies," says Mr Chan. "This is a good time to tap onshore liquidity and we expect more follow-on issuance." 

HSBC recently became the first foreign bank to act as joint lead underwriter for an onshore asset-backed securities deal. This was a Rmb3.5bn issue from BMW's local automotive finance arm which, unusually, included an international rating. "We structured the transaction to be in line with BMW's international programme and with international best practice," says Lynn Maxwell, HSBC's global head of securitisation. "We didn't want it to be saleable only to domestic investors."

Hint of green

Offshore renminbi bonds are not done for just yet, particularly for Chinese investors who do not face the currency risk of any further devaluation. This was evidenced by an October Rmb1bn two-year deal from China Construction Bank, on which HSBC was joint global coordinator, lead manager and bookrunner. Launched with guidance of 4.55% and more than five times oversubscribed, it was printed at 4.3%, below existing secondary levels. 'Asia' took 99% of the deal, with only 1% going to Europe.

A particularly notable transaction was PBOC's first offering outside China, a Rmb5bn one-year issue on the London market, timed to coincide with Chinese president Xi Jinping's state visit to the UK. Here too, HSBC acted as joint global coordinator, lead manager and bookrunner, on a deal which tightened 20 basis points after launch to price at 3.1%. As sovereign funding, it attracted a wider geographical mix of investor, with 25% going to the US, 24% to Europe and 51% to Asia.

The bank played a similar role, as well as being 'green bond advisor', on the inaugural green bond from Agricultural Bank of China. This featured three tranches in two currencies – $400m three-year paying 2.125%; $500m five-year paying 2.75% and offshore Rmb500m two-year paying 4.15%. The renminbi tranche was eight times oversubscribed, and all were priced at the tight end of guidance.

This was the first ever green bond from a Chinese bank, the first offshore renminbi green bond from Asia and the largest US dollar green bond out of Asia. International interest was highest in the five-year dollar piece, 16% of which went to Europe, the Middle East and Africa investors, while the rest was bought by Asia.

"The key question for green bonds in China is how to marry international precedents with regulatory requirements unique to China in the onshore market," says Mr Chan. "HSBC launched its own green bond in euros just a few weeks ago so we have been able to share best practice, as well as the latest intelligence on green bond investor dynamics."

Leading the way

Chinese issuers have increasingly been taking advantage of the volumes available in G3 currency bond markets (the US, Japan and the EU), as they look to diversify funding for mergers and acquisitions activity. A notable feature of this offshore funding in 2015 was a heightened interest in the euro market.

"The dollar has been the offshore market of choice but, with the European Central Bank's bond purchase programme, conditions in European bond markets have been attractive," says Mr Chan. "We have brought a range of Chinese issuers to the euro market and these have been warmly received." Some Chinese clients, he adds, have skipped the dollar market and gone straight to the euro for their foreign currency debuts.

HSBC was joint lead manager and bookrunner on China Development Bank's first offshore foreign currency bond in a decade. The bank raised $1bn in five-year paper with a 2.5% coupon, priced at the top end of guidance. By contrast, it sold a €500m three-year tranche paying 0.875%, priced at the tight end of guidance.

"What has been noticeable is the consistency of official efforts with respect to the internationalisation of the renminbi," says Mr Chan. "The level of interest in China from our international clients has never been higher."

He and his colleagues believe the scale of China's onshore market makes these recent developments hugely significant. "The opening up of the onshore renminbi market could be as transformational for global capital markets as the launch of the euro was in 1999," he says.

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