Dim Sum Bonds

The Offshore Renminbi (RMB)-Denominated Bonds

Hung-Gay Fung, Glenn Chi-Wo Ko, Jot Yau

• Publisher: Wiley
• Year: 2014
• Print ISBN: 9781118434796
• eBook ISBN: 9781118839638
• Edition: 1
• Topic: Commerce
• Subtopic: Obligations

A comprehensive guide to understanding and assimilating into dim sum bond markets

The expansive growth of the dim sum bond market in the last five years has peaked investor interest and inspired companies to seek out investing opportunities that negate China's capital controls. In a four-pronged approach, Dim Sum Bonds examines the development of the dim sum bond market and its role in China's RMB internationalization policy, characteristics of dim sum bonds and its market, investors' investment objectives and the investment performance of dim sum bonds, motivations of issuers, and underwriters' roles in the dim sum bond market. You will familiarize yourself with every aspect of the dim sum bond market from an issuer, an investor, and an underwriter's perspective. Academics, financial advisors, investment bankers, underwriters, investors, and policy makers should not be without this informative and detailed guide to the offshore market central to China's internationalization of RMB.

• Written by Hung-Gay Fung, Glenn Chi-Wo Ko, and Jot Yau, all of whom are experts on the dim sum bond market
• Explains the rapidly expanding dim sum bond market and puts readers ahead of the curve
• Landmark issues, Chinese banks (China Development Bank), Infrastructure, red-chip companies (Sinotruk), and multinational corporations doing business in China (McDonald's) are discussed in detail.

Covering landmark issues from a variety of Chinese and multinational corporations, Dim Sum Bonds provides must-read manual to understanding the vast opportunities of this up-and-coming market.

CHAPTER 1

New Market—Developments, Opportunities, and Challenges

1.1 INTRODUCTION

Since its economic reforms in late 1978, China's economic growth has been robust, at around 9 percent per annum despite signs of slowing down in the wake of the 2008 global financial crisis.1 The sustainable and solid economic growth has catapulted China into the second-largest economy after the United States, so it is natural that China seeks to play a bigger role in the world economy. One major policy goal of the Chinese government in the coming decade is to make its currency, the renminbi (RMB),2 a global reserve currency, and thus internationalizing the RMB has become a strategic goal.

Since March 2009, Governor Zhou of the People's Bank of China (PBOC) has urged the International Monetary Fund (IMF) to include the RMB as part of the special drawing rights (SDRs). A major obstacle to embracing the RMB as a global reserve currency is its limited convertibility outside China. The inclusion of the RMB as a global reserve currency along with the U.S. dollar and the euro by other countries requires that the RMB must be fully convertible into other currencies and widely circulated outside China for trade settlement.3 Thus, China has strategically designed economic policies vying to gain the global reserve currency status for the RMB.

China has a tight control on its capital account for monitoring the fund flows across its borders to avoid speculation and shocks from international markets, while the current account on international trade has been opening up to promote trade. In addition, China has switched its fixed exchange rate to pegging it against the U.S. dollar to a basket of currencies of its key trading partners. Fluctuations of the RMB exchange rate against the U.S. dollar are still under the control of the Chinese government, with a trading band widening over time. Fluctuations in the foreign exchange rate have a huge impact on China's economy in terms of trade and capital flows. Thus, the stability of the RMB value remains one of key policy concerns of the Chinese government.

To help internationalize its currency, China has taken several steps in developing different offshore RMB currency trading centers, such as Hong Kong, Tokyo, London, and New York. In March 2011, China published the 12th Five-Year Plan for the National Economic & Social Development, which interestingly contains a chapter elaborating on the significant functions and positioning of Hong Kong in the implementation of China's economic development plan. It is clear that China will support Hong Kong in consolidating and enhancing its competitive position in being an international financial, trade, and shipping center, and in becoming an offshore RMB hub for trade and investment. On many occasions, Chinese leaders have reiterated their continual support with policies that strengthen the economic ties with Hong Kong, which was promulgated in the Closer Economic Partnership Arrangement (CEPA) of 2004, which is a free trade agreement between China and Hong Kong removing barriers of trade and investment and eliminating the tariff between the two economies.

As the cross-border trade between Hong Kong and China increased and the RMB trade settlement rose accordingly, corporations had started to accumulate RMB funds in Hong Kong. Meanwhile, individuals had accumulated RMB deposits as they made a one-way bet on RMB appreciation. Hong Kong banks had accumulated the most offshore RMB deposits. As individuals were looking for opportunities to enhance returns in addition to currency appreciation, offshore RMB bonds would offer an option for risk-averse investors. For corporations that receive RMB through trade settlement, offshore RMB bonds would provide a ready tool for flexible treasury management—for liquidity and yield. With the opportunity to invest in RMB-denominated assets other than RMB bank deposits, investors, banks, and foreign governments would be more willing to hold the RMB in their portfolios, enhancing the RMB's worldwide circulation.

In light of the availability of RMB outside China, the dim sum bond market thus came into being as part of China's grand economic policy in making the RMB a global reserve currency. The dim sum bond market is also compatible with the goal of developing the domestic bond market and reducing Chinese companies' reliance on debt finance from bank loans. By issuing dim sum sovereign bonds in the offshore market, investors essentially extend a low-interest-rate loan to the Chinese government, while the Chinese government can finance a myriad of investments, such as huge infrastructure projects and foreign asset acquisitions. Likewise, corporations issuing dim sum bonds can raise funds offshore as an alternative to domestic borrowing. With competition from offshore markets, the domestic financial markets in China may develop into more efficient markets with greater depth than they otherwise might have if China did not pursue these policies. The keen competition from offshore markets may also make Chinese banks and companies more competitive.4

As part of its grand policy for internationalizing the RMB, the Chinese government has been promoting cross-border trade settlement in RMB and has planned to gradually open up its capital accounts. China's Ministry of Commerce (MOFCOM) has allowed foreign direct investment (FDI) in RMB since September 2011. This policy could have profound implications for harnessing asset speculation and inflation in mainland China. Regardless of the origin of the FDI and in what currency, as long as China's inward FDI is exchanged into RMB and flows through Hong Kong, it will have minimal impact on China's foreign reserve and money supply. The offshore RMB trading center in Hong Kong, where most impact from FDI into China will be felt, plays a crucial role in minimizing the inflationary and speculation pressures in China due to inward FDI while helping China to maintain its monetary and exchange rate policy independence. This is probably the reason why Hong Kong has received the blessing of the Chinese central government for developing into an offshore RMB center, serving as a buffer zone for China for the purpose of controlling hot money flows into China and curbing inflation and speculation due to these money inflows.5

The Chinese government envisions utilizing Hong Kong as part of the grand strategy to achieve its goal toward internationalizing the RMB. Hong Kong is well positioned in assisting and supporting the rapid development of China's policy objective, especially in the development of an offshore RMB-denominated bond market. Hong Kong has been ranked consistently among the top financial centers in the world for many years. It has served as an international center for raising capital for the Chinese government and mainland Chinese firms. Free trading of the RMB in Hong Kong has been in effect for a few years, and it is expected to pave the way for trading offshore RMB bonds in other hubs in the future.

To summarize, the offshore RMB market has been developed as part of a multipronged strategy of the Chinese government to (1) internationalize the RMB to become a global reserve currency, (2) control smooth cross-border capital flows to China so as to harness the inflation in mainland China, and (3) develop an offshore RMB bond market as a means to tapping foreign capital. The timeline of the historical events in the offshore RMB market is presented in Vignette 1.1.

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VIGNETTE 1.1 EVOLUTION OF THE OFFSHORE RMB MARKET

...

Date	Events
December 2003	The Hong Kong Monetary Authority (HKMA) annou­nced CNY business on a trial basis in Hong Kong.
February 2004	Personal RMB banking business and RMB deposits allowed in Hong Kong and Macau; Bank of China (Hong Kong) designated as RMB clearing bank.
December 2005	Settlement agreement on RMB business for designated business customers.
January 2007	Qualified mainland financial institutions permitted to issue RMB bonds in Hong Kong (dim sum bonds).
July 2007	China Development Bank (CDB) issued the first offshore RMB bond (dim sum bond) in Hong Kong.
December 2008	China signed its first bilateral local currency swap arrangement with South Korea.
July 2009	Pilot RMB trade settlement scheme for five mainland Chinese cities with Hong Kong and Macau.
September 2009	China's Ministry of Finance launched three tranches of dim sum bonds to retail and institutional investors.
February 2010	National Development and Reform Commission (NDRC) issued Elucidation of Supervisory Principles and Operational Arrangements Regarding Renminbi Business in Hong Kong.
June 2010	Extension of RMB trade settlement scheme to 20 mainland provinces and all overseas countries and regions.
July 2010	Restrictions on offshore RMB business mostly lifted; RMB interbank market formed. Debut of the first landmark issue of dim sum bonds: Hopewell Highway Infrastructure, the first nonfinancial dim sum issuer and the first issuing entity incorporated in Hong Kong.
September 2010	Hong Kong exchanges launched clearing system for potential listing of RMB denominated bonds and stocks.
December 2010	Extension of the number of domestic exporters in the pilot scheme for cross-border trade settlement in RMB from original 365 to over 67,000; the first synthetic RMB bond issued.
January 2011	Pilot program allowing some mainland nonfinancial enterprises to settle overseas direct investments in CNH.
April 2011	The first CNH IPO by Hui Xian Real Estate Investment Trust.
August 2011	Vice Premier Li Keqiang visited Hong Kong, announ­cing concessions on FDI and Renminbi Qualified Foreign Institutional Investor (RQFII); RMB trade settlement scheme expanded to the whole of China.
December 2011	China Securities Regulatory Commission (CSRC) granted its first batch of licenses under RQFII scheme.
January 2012	Hong Kong's three note-issuing banks published RMB interbank offered rates; Hong Kong Securities and Futures Commission approved 17 RQFII products.

Table of contents

• Cover
• Praise for Dim Sum Bonds
• Series
• Title Page
• Copyright
• Dedication
• Preface
• Acknowledgments
• Acronyms and Key Terms
• Chapter 1: New Market—Developments, Opportunities, and Challenges
• Chapter 2: Offshore RMB-Denominated Bonds—Dim Sum Bonds
• Chapter 3: Issuers
• Chapter 4: Investors
• Chapter 5: Investment Banks and the Dim Sum Bond Issuing Process
• Chapter 6: Case Studies of Landmark Issues
• Chapter 7: Conclusion
• About the Authors
• Index