Tag Archives: dim sum bonds

London Expands As Offshore Yuan Center

Last year, the British and Hong Kong governments agreed to promote London as a center of trading offshore yuan. This week, some meat was put on the bones of that agreement with the issue of a three-year yuan-denominated bond in London. HSBC was the lead on the deal, the first so-called dim sum bond to be issued outside China. It raised 2 billion yuan ($317 million), mostly from European investors, and yields 3%. Demand from investors was so heavy that HSBC doubled the bond from its originally planned size.

Yuan-denominated deposits in London totaled 109 billion yuan at the end of 2011, according to a report commissioned by the financial district’s government and published to coincide with the launch of a working group to develop London as the western hub for offshore yuan business. The group includes HSBC, the biggest issuer of dim sum bonds in Hong Kong, and Bank of China.

London’s is a sufficient pool of liquidity to start supporting a bond as well as a foreign-exchange market, but it is still less than a fifth of the 566 billion yuan in renminbi deposits in Hong Kong as of February. Despite the strong push London is making, Hong Kong remains the leading offshore yuan market, as Beijing desires. Singapore and New York also have designs on the business but London has stolen a march on them.

China’s doubling of the yuan’s trading band and other recent financial reforms, including allowing banks to hold short dollar positions, raising the ceilings on foreigners’ equity and bond investments in China, and a trial of giving domestic Chinese investors more access to offshore yuan markets, are all part of Beijing’s drive to expand the international use of its currency that started in 2008. More optimistic financial reformers have pencilled in 2015 for full convertibility. The more cautious fear that would be a destabilizingly quick timeline, especially if GDP growth continues to slow.

If the on- and offshore interbank markets forge a close link, that could force the pace. However, the offshore market is still in its infancy. Baby steps are yet to be made. In June, Hong Kong plans to extend its yuan payments trading to overlap with London hours. For its part, London is working on setting up local yuan clearing and settlement systems, probably piggy backing off Hong Kong’s. More European banks are expected to follow HSBC’s lead in issuing dim sum bonds in London later this year, as are the Agricultural Development Bank of China, China Development Bank and the Export-Import Bank of China.

Other yuan-denominated investment products will likely follow. But how fast London, or any other financial center, can develop as a hub of offshore yuan trading, will ultimately be determined by how quickly Beijing opens its capital account and lifts its foreign exchange controls so there is a sufficient volume of internationally circulating yuan to support the business. At present for every yuan deposited outside China, there are 99 inside.

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World Bank Issues First Yuan-Denominated Bond

The long march to the internationalization of the yuan has taken a step forward with the World Bank’s issuance of its first yuan-denominated bond. The Bank is raising 500 million yuan ($76 million) through its International Bank for Reconstruction and Development, with the AAA-rated bond maturing in 2013 and carrying a coupon of 0.95%. Doris Herrera-Pol, Global Head of Capital Markets at the World Bank says,

“This is a landmark transaction for the World Bank as it is the first World Bank issuance in RMB, and signals the strong interest of the World Bank in supporting the development of the RMB market.”

Last year, more than 40 billion yuan of yuan denominated bonds, so called dim sum bonds, were issued in Hong Kong as the market, established only the previous year, took off from virtually scratch. Some 30 issuers in 2010 ranged from the Chinese government and the China Development Bank to the Asian Development Bank and multinationals such as McDonald’s and Caterpillar.

In December, HSBC, the second largest foreign underwriter of dim-sum bonds, forecast that new issuance would more than double this year to 80 billion yuan. Another World Bank issue, to raise 100 million yuan for its private investment arm, International Finance Corp., is reported to be in the pipeline.

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