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Saturday, 22 November 2014

Too big to ignore

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The internationalisation of the renminbi has been the most significant development in the financial markets since the introduction of the euro.

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For many the internationalisation of the renminbi has been one of the most significant developments in the financial markets since the introduction of the euro. It is hard to disagree. Daily trading volumes in the US dollar and offshore renminbi now exceed the equivalent of US$2bn according to Deutsche Bank.

Ever since the first issue of an offshore renminbi bond by China Development Bank five years ago, immediately dubbed Dim Sum bonds by capital market wags, more than 100 other issuers have followed suit. Everyone from the World Bank and HSBC, to McDonald’s and Volkswagen has rushed to take advantage of renminbi liquidity.

Originally an issuance curiosity, the market is now far too big to ignore. The CNH fixed income market in the first quarter of this year saw a gross supply of Rmb80.7bn (US$12.7bn) and a net supply of Rmb71bn. That was a growth of 460% and 376% respectively, according to Deutsche Bank. The only way appears to be up. Dim Sum supply is expected to make up 50% of the Hong Kong bond market by 2015.

“We now see more issuance in Asia via offshore renminbi than either the Singapore dollar or the Hong Kong dollar. This is now a legitimate currency for issue. It is clearly not the size of the US dollar market or the euro market yet, and in the grand scheme of things the market is still at an early stage, but it continues to grow quickly,” said James Fielder, head of local currency syndicate, Asia, global markets, for HSBC.

Growing up

What has changed is that the market has grown up. Dim Sum issuance is no longer frontier. It has moved front and centre and become mainstream. Perhaps the most significant change occurred in mid-March when Wen Jiabao, China premier, pointed out that the renminbi was close to its “equilibrium value” against the US dollar.

Even last year a renminbi bond sale was a one-way bet. With the currency appreciating around 4% a year against the US dollar, even low bond yields were an investment no-brainer thanks to the currency pick-up.

“Currency speculation has now been taken out of the equation,” said Herman Bake, head of global risk syndicate in Asia for Deutsche Bank. “Policy makers are saying that CNH and CNY are at equilibrium, and that is a fair assessment.”

As importantly, regulation to help the offshore renminbi market develop has been put in place. More than half of the 13 major currency restrictions on cross-border currency have been deregulated already and in mid-May, the Hong Kong Monetary Authority continued with another one. Authorised financial institutions are now allowed to determine their own net open positions in renminbi. The cap had been set at 20% which was itself raised from 10% in January.

“Regulation is heading in the right direction and it is moving faster than people expected it to. Remember that too rapid deregulation comes with its own problems,” said Mark Leahy, head of debt capital markets and debt syndication at Nomura International in Singapore.

“Deregulation is a measured process,” said Aaron Russell-Davison, head of debt syndicate for Asia at Standard Chartered Bank in Singapore. “These steps are precisely what you would expect – we are moving towards the ultimate convertibility of a currency that will have a major impact on global finance; the pace should be measured because the outcome is so important.”

Yet another milestone can been seen with the launch of the six new currency-trading pairs tied directly to the renminbi that HSBC launched towards the end of May. “Clients no longer need to go via the US dollar anymore, in the same way the euro/yen market is quoted,” said HSBC’s Fielder. The euro, the British pound, the Hong Kong, Singapore and Canadian dollars and the Mexican peso are all quoted directly against the renminbi.

“We are moving towards the ultimate convertibility of a currency that will have a major impact on global finance; the pace should be measured because the outcome is so important”

These developments have allowed real deals to come to the market. South Korean Chaebol Lotte Shopping, Caterpillar, the world’s largest manufacturer of construction and mining equipment, and French gas-provider Air Liquide are some of the big names that have sold bonds in the Dim Sum market this year.

And the milestone deals keep racking up. In February, Mexican telecoms America Movil sold the first SEC-registered Dim Sum – an Rmb1bn three-year issue at 3.5%. (See profile on America Movil). More than a quarter of the paper was placed into the US and just under 20% into Europe, which was by far the greatest distribution outside Hong Kong to date. A month later, the Dubai-based bank Emirates NBD sold a Rmb750m 4.875% three-year. It was the first in the region and drew an order book in excess of Rmb4.3bn.

What has also helped is that at the same time, fewer of what were essentially club deals with six Chinese banks as leads are coming to market, and high-yield is remaining just that. In November Lafarge Shui On Cement, the Chinese arm of the world leader in building materials, was the first and last European-owned issuer to launch a high-yield paper in the offshore renminbi market. And it had to pay up. The Rmb1.5bn three-year bond priced at a hefty 9%.

“The Asian US dollar high-yield market has not been huge this year,” said StanChart’s Russell-Davison. “But you have to remember that Dim Sum issuance is not immune to those factors impacting that market; it’s not an insulated Plan B. If a high-yield credit can’t raise funds in US dollars, it is unlikely that it can easily issue in renminbi.”

No surprise perhaps that shorter-term issuance continues to dominate. Certificate of deposit issuance accounted for 58% of the net supply in the first quarter of this year, according to Deutsche Bank. But this needs to be seen in perspective.

“The market picks up on the short-dated renminbi issuance because people are talking about it. You have to remember that the same thing is happening in yen, euro and the Australian dollar markets, it is just that in the rest of the world that doesn’t get talked about,” said Nomura’s Leahy.

Although tenors of three years are the current sweet spot, longer ones have started to emerge. In January, for example, policy bank China Development Bank priced a 15-year Rmb1.5bn at 4.2%, the longest tenor yet in the market.

There has been much excitement about the internationalisation of the renminbi outside Asia. There was massive hoopla earlier in the year as London tried to position itself as a trading hub for the renminbi. “This morning, we saw the launch of the first renminbi bond outside of Chinese sovereign territories. And it happened here in London,” trumpeted British finance minister George Osborne in April of the increased HSBC Rmb2bn three-year deal at 2.875%.

It is a move that is both more and less important than that. It is less important because it wasn’t the first renminbi bond sold outside Chinese territory or even the first to be listed in London. That honour went to BP which sold a Rmb700m 1.7% three-year in September last year.

But it is much more important because what issuers have seen is that offshore renminbi bonds are accessible and of interest to European investors. It is estimated that there are Rmb109bn deposits in London alone. No surprise then that the HSBC deal was more than twice oversubscribed and 60% of the allocation went to Europe.

In the last month alone there has been a sale from Swiss private bank Vontobel and Sweden’s Svensk Exportkredit while German government-owned development bank KfW, priced the largest offshore renminbi bond from a non-Asian sovereign, supranational or agency issuer to date: an Rmb1bn two-year at 2%. Dim Sum bonds are no longer the preserve of Asia.

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