offshore renminbi: the bond market in depth · hong kong, august 2011 2 ¬ ¬ offshore renminbi...

OFFSHORE RENMINBI: THE BOND MARKET IN DEPTH

offi cial sponsors:

Hong Kong, August 2011

EM RMB RT 2011.indd 1 13/09/2011 18:14


2 ¬ ¬ offshore Renminbi Bond Market Roundtable

EM: Let’s start by discussing the rapid growth of the offshore renminbi debt market over the past year. What has caused the rise in both vol-umes and the frequency of issuance that we have seen since the middle of 2010? Why is China developing this market?

Lau, Moody’s: This market has since July 2010 grown rapidly with a more diversified group of is-suers, including high-yield names. From a regula-tory point of view, the rapid growth of both ren-minbi deposits and of monthly trade settlements in renminbi occurred after People’s Bank of China (PBOC) and the Hong Kong Monetary Authority issued a series of supportive regulatory measures. That was why there were such low volumes before, but to look at why volumes grew so quickly you also have to consider the economics for issuers and investors.

Issuers are interested in this market because of the cost. It is a basic case of supply and demand. There is such a small supply of renminbi bonds outside of China that this market can be signifi-cantly cheaper than the offshore market. From an investor’s standpoint, one of the main drivers is the expectation of currency appreciation.

De Boursac, ASIFMA: This market is being very deliberately developed by the Chinese authorities. The government’s recent [Rmb20 billion multi-tranche offshore renminbi] bond issue was a signal to market participants that the market will contin-ue to be developed, and the Chinese government is really behind it. When they sold that deal, they sent over some pretty senior figures to Hong Kong. That was a clear sign of their future intentions.

Why are they developing this market? It is about reducing the foreign exchange risk being taken by Chinese importers and exporters. They want to have more trade flows denominated in renminbi, so Chi-nese importers and exporters can get the foreign par-ties to manage the exchange risk. But to do that, you actually need some investable assets offshore. That is why the offshore bond market has been created.

Hu, BOCHK: The big picture here is the interna-

tionalization trend of the Chinese renminbi. As the Chinese government continues to liberalize the use of renminbi outside the mainland of China, the off-shore renminbi debt market is bound to grow amid rising supply and demand for renminbi capital.

Pratt, Barclays: This market is clearly being driven by expectations of currency appreciation.

The primary users of the market have been Chi-nese companies taking advantage of the arbitrage between offshore and onshore renminbi rates, as in-terest rates go up onshore. There have been certain international companies that have taken advantage of the market as well. But there are still some key restrictions.

For international issuers, there is one obvious re-striction: the ability to deploy the funds. Bringing the money back onshore is problematic at the mo-ment. A number of foreign issuers have been able to do that, but it’s still an area of great uncertainty and that’s restricting the number of deals.

From the investor side, there are not enough large, true benchmarks to allow broad participation from global investors. That is a bit of hindrance on the growth of the market. We do expect things to get easier on both fronts, and then the market will continue to grow.

Hui, Schroders: The timing of renminbi interna-tionalization and the development of the offshore renminbi debt market was quite good, as global in-vestors were losing confidence in the G3 markets at the time. China is the second-largest economy and the largest exporter in the world, and the develop-ment of the offshore renminbi bond market offers foreigner investors’ access of that bond market, which was largely non-investable a year ago.

On the supply side, tightening in lending in mainland China and lower cost of funds drive Chi-nese borrowers to the offshore RMB market.

This market had a good start, and we expect very strong growth potential in the years ahead.

EM: What about the Ministry of Finance’s multi-tranche Rmb20 billion deal recently? That was an attempt to create a yield curve and a benchmark

Renminbi deposits in Hong Kong reached Rmb553 billion ($86.58 billion) at the end of June, a 521% jump from the year earlier. Some analysts think they will go beyond Rmb1 trillion before the end of

the year. These swelling deposits point to the Chinese government’s attempts to develop the offshore renmin-bi in small steps, internationalizing its currency by first allowing some offshore use — but they also show that bankers will need to work fast to create investment op-portunities in the offshore renminbi market.

The offshore renminbi bond market is the main hope, but there are plenty of questions the market still needs to answer. How often and how freely can companies bring the proceeds of offshore renminbi bonds into mainland China? When are more compa-nies going to get ratings before selling bonds? When will a swap market develop? Will investors buy long-er-dated bonds? We put these questions to some key market participants.

Participants in the Offshore Renminbi Bond Market roundtable, sponsored by Barclays Capital, Moody’s Investor Services and Nomura, were:

Nicholas de Boursac, chief executive and managing director, the Asia Securities Industry & Financial Markets Association (ASIFMA)

Ivan Chung, vice president, senior analyst, Moody’s Investor Services

Ken Hu, deputy chief investment officer, BOCHK Asset Management

Francis Ho, group treasurer, CLP Holdings

Angus Hui, fund manager, Asian fixed income, Schroders Investment Management (Hong Kong)

Gary Lau, managing director, corporate finance, Moody’s Investor Services

Mark Leahy, head of debt origination and fixed income for non-Japan Asia, Nomura

Jon Pratt, head of Asia debt capital markets ex-Australia and Japan, Barclays Capital

Tang Zhi Jin, financial controller, Sinochem Hong Kong (Group)

Jean-Marc Turchini, chief financial officer, Suez Environnement

Wang Xiao Bin, chief financial officer, China Resources Power Holdings

Mason Wu, managing partner, Prudence Investment Management

Ben Yuen, head of fixed income, pan Asia, UBS Global Asset Management

Ben Yuen, uBS GloBal aSSet ManaGeMent

anGuS Hui, ScHroderS inveStMent ManaGeMent

EM RMB RT 2011.indd 2 13/09/2011 18:15


offshore Renminbi Bond Market Roundtable ¬ ¬ 3

for other issuers. Is that going to be useful for investors?

Yuen, UBS: The MOF issued different maturities and did, in some sense, set a benchmark. That is a good thing for investors. But are we using the MOF curve at the moment? Not really. It is not liquid enough. We would certainly use that curve if it was very liquid, but we are not there right now.

We understand why that is: the market is still de-veloping. But until there is more secondary trading, the government is not really going to be able to set a wider benchmark.

De Boursac, ASIFMA: We should re-member that China’s domestic renminbi government bond market is also pretty illiquid, and that it is a lot bigger than the offshore renminbi government bond market in Hong Kong. It is going to be several years at least before we have a liq-uid government bond market offshore.

Leahy, Nomura: In my mind, the im-portance of the MOF transaction was its size and its timing. It was the largest off-shore sovereign deal in Asia, and found good demand when the global markets were pretty much closed. That says a lot about how attractive investors find the offshore renminbi market.

EM: How much does investor demand in this market depend on currency appreciation?

Wu, Prudence: It is not all about currency appre-ciation, although that is a big factor. The dim sum market already has a large credit element in it. We see a lot of high yield issues, and a lot of first time issuers, so there is already a strong credit element in it. It is just as important to do your homework in this market as it is elsewhere. You cannot buy risky credits just based on the currency appreciation.

Hu, BOCHK: It is more than simply currency ap-preciation. Offshore renminbi bonds offer diversifi-

cation benefits in terms of currency, yields and credits. We have conducted a study on 40 currencies over the past five and 10 years respectively, and found that ren-minbi had very low or even negative correlations with other major and emerging market currencies. The cur-rency also had the lowest volatilities in our study — as did China’s government bond yields where compared to other G7 and major emerging market government bond yields.

We are seeing more Chinese bond issuers that have never sold bonds outside mainland China issuing off-shore renminbi bonds. These first-time issuers can certainly add diversification benefits, adding another

argument besides currency appreciation for this mar-ket. The credit spectrum is widening.

Think about a pension fund, a long-term insurance fund or even a government’s foreign reserve portfolio. How much Chinese renminbi do they have? It is basi-cally zero. Given the size of China’s economy and its huge export and import volumes, I believe it will be natural for the renminbi bonds to rise as an asset class for institutional investors.

Yuen, UBS: Ken Hu is right that in the long-run, the renminbi may be of consideration to pension funds. But in the short-run, the market is just not big enough to offer pension funds any reasonable level of diversi-fication and that is why they have not started to really move in that direction.

Hui, Schroders: I suppose we can view this in three phases. During the initial stage, say around one year ago, investors’ demand for dim sum bonds depended on currency appreciation potential. But the market is growing, and we are now at the beginning of the sec-ond stage. While currency appreciation is still an im-portant demand factor, a full spectrum of credit mar-ket opportunities are emerging, in both investment grade and high-yield credits. This helps to broaden the investment universe and diversification in Asian credits. It is worth noting that some investors buy dim sum bonds and hedge back to their home currencies, as they explore the credit value rather than use offshore

renminbi bonds as a currency play. In the third stage, as offshore rates gradu-

ally converge with the onshore rates over the next few years, we expect demand for offshore investors who want to access the interest rate opportunities in China.

EM: The offshore renminbi market still does not offer much in the way of long-term financing opportunities to issuers. Most of the deals we see are in the three or five year part of the curve. Is that something you think will change soon?

Ho, CLP: It is very interesting for us to con-sider this question. It is much easier for inves-tors to be confident about a short-term rise in

the currency, which we think limits demand for long-term bonds. But we have now started to hear from banks that if we want to extend the tenor to seven, 10 or 15 years, it is possible. That is very good news for us.

We are in the utility sector, and we don’t want to concentrate a lot on short-term maturities with our debt. That can lead to refinancing problems, so we are hoping that the average maturity of the market will start to get longer.

Yuen, UBS: It’s very hard in the current environment. We often talk about the interest rate gap between onshore and offshore bonds; for example, onshore government bonds pay 1.5%-2% more than those offshore in the 10-year part of the curve. That sort

GarY lau, MoodY’S inveStor ServiceS

FranciS Ho, clP HoldinGS

“The offshore renminbi debt market is bound to grow amid rising supply and demand for

renminbi capital” — Ken Hu, BoCHK

EM RMB RT 2011.indd 3 13/09/2011 18:15



of differential makes a lot of investors afraid to take long-term exposure because they worry that the two markets might move closer together, leading to losses for investors in long-term bonds.

I agree we need to see a development of longer-term bonds in the offshore renminbi market. That is a very important step. But until yields in the offshore and onshore markets move closer together, it will be dif-ficult to convince many investors to buy those bonds.

Leahy, Nomura: That point is key. Because you have so much of a gap between the offshore and onshore curves, investors know that the longer tenor they take, the greater the risk that there will be some con-vergence and the offshore bonds will underperform. Until the spreads move closer together, investors will remain more focused on the short-end of the curve.

Ho, CLP: This is something we all need to work to-gether to solve: the financial intermediaries, the inves-tors and the issuers. It will be challenging to come up with a solution, but we need to fill the gap.

Hu, BOCHK: More attention would need to be paid to life insurance companies selling renminbi denomi-nated policies in Hong Kong. They have natural de-mand for long maturity renminbi bonds for hedging against their long term renminbi liabilities.

Hui, Schroders: Insurance companies, pension funds and other institutional investors would like to come to this market if the size allows them to achieve a certain critical mass, and when they can look at a longer his-tory for this market. We have received many enquiries about this area from our institutional clients, but most of them will want to look at a few years track record, so it may take a bit of time. We also need a yield curve to get developed. The more institutional investors we get into the market, the more likely we are to start to see demand from longer-dated issuances.

EM: But will insurance companies and pension

funds invest in this market even when there is such a risk of convergence between offshore and on-shore rates?

Hu, BOCHK: Yes. It is more a question of asset-liability management. If the purchase yields of off-shore renminbi bond investments are higher than the yields of life insurance policies sold, the offshore renminbi bonds would usually be held to maturities as long as their credit profiles remain sound. The subsequent offshore and onshore yield convergence, if any, would not be a major concern as long as the asset-liability management is managed properly on day one.

Pratt, Barclays: We certainly do need to try to ex-pand the investor base if we’re going to develop this market, but we have a big opportunity to do that at the moment. It is a question of educating global in-vestors about the market. The China sovereign’s lat-est bond was a good example. A lot of investors did not know how to participate in the auction process for these bonds, so they need some education. But they will become more familiar with the market and we will see new investors coming to the market all the time, including those willing to buy longer tenor bonds.

Hui, Schroders: Yields are obviously lower in the off-shore renminbi market, but that difference is much bigger in the short term, over 300bps at the very short end. If we start seeing bond yields coming down in China, the gap could actually narrow in the long end quite quickly. China’s 10-year government bond yield was at 3.2%-3.4% in the third quarter last year, and is now over 4%. This compares to a 10-year offshore government bond trading at 2.4% yield currently.

Hu, BOCHK: In terms of high-yield bonds, the con-vergence is already taking place as I see some high-yield offshore renminbi bonds are already trading at similar yields of their onshore peers. For example,

both the offshore and onshore three-year renminbi bonds of China Shanshui Cement are trading at mid 6% recently. In a broader sense, it is interesting to see that Chinese companies may issue bonds in onshore renminbi bond market, offshore renminbi bond mar-ket and the US dollar bond market. Investors may need to gauge their relative values among these three markets.

Wang, China Resources: It is almost inevitable that someday these markets will have to converge. Why are we able to fund cheaper offshore than onshore? The reason we are still able to capture the low cost of ren-minbi offshore is because of the regulatory environ-ment. People are not easily able to bring the renminbi offshore.

EM: What are the areas of the offshore renminbi market that need to be improved?

Leahy, Nomura: One of the key deficiencies in the offshore renminbi market, particularly when you get to the credit space, is a lack of any typical market con-vention. Ratings are a good example. I think there are only three rated high-yield deals in the offshore ren-minbi market. That is entirely non-standard.

Ratings are a key component of all major debt markets. That aids investors not just in the sense of helping them do their homework, but providing an independent reference allowing apples to apples comparison, using a like-for-like rating methodol-ogy. That element of market standardization — whether it’s ratings or covenant packages or struc-tures — is something that the market needs to take on board.

Lau, Moody’s: Mark Leahy makes a good point. We see a lot of unrated credits in the offshore renminbi market, especially on the high-yield side. But more and more, investors need to look at the credit quality of the issuer. We think that rating agencies will cer-tainly have an important role to play in this market.

Jean-Marc turcHini Suez environneMent

Mark leaHY, noMura

ivan cHunG, MoodY’S inveStor ServiceS

EM RMB RT 2011.indd 4 13/09/2011 18:15

Navigate with Confidence In a dynamic credit environment, there’s a lot of information to take in. Moody’s rigorous, transparent rating methodologies and analytic expertise help to synthesize diverse perspectives and focus on what matters most to fundamental credit quality. The result? Ratings and research that help you navigate markets with confidence.

For more information visit moodys.com or call +212.553.1653.

Navigate with Confidence In a dynamic credit environment, there’s a lot of information to take in. Moody’s rigorous, transparent rating methodologies and analytic expertise help to synthesize diverse perspectives and focus on what matters most to fundamental credit quality. The result? Ratings and research that help you navigate markets with confidence.

For more information visit moodys.com or call +212.553.1653.

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Independant credit analysis essential for efficient markets

Independant credit analysis essential for efficient markets



Yuen, UBS: We think more rated issues will be com-ing to the market soon, but investors need to behave themselves and bankers need to make strong argu-ments to the issuer community.

In the first half of this year, investors were hungry for any exposure to offshore renminbi and it was not a responsible environment. But investors have be-come more disciplined over the last few months, and are doing more due diligence. We would like to see more ratings.

EM: Is this is a widespread hope? Do investors really care about ratings in the offshore renminbi market?

De Boursac, ASIFMA: The ratings are very important for certain types of investors. Not only would these in-vestors like to see issuers rated, they’d also like to see issue ratings as well. For the market to develop it would be beneficial to see more and more ratings.

Chung, Moody’s: The offshore renminbi is very simi-lar to other hard currencies in terms of the rating ap-proach. The process of rating dim sum bonds would be very straightforward, as they would probably get the same rating as they would in the international dollar market.

Lau, Moody’s: In order to attract more institutional investors to participate in this market, rating will cer-tainly help. It will also facilitate a more liquid sec-ondary market and benefit the development of the market.

Hui, Schroders: Many bond deals printed without credit ratings as demand exceeded supply significantly. At the same time, the investor base was initially lo-cal investors who are less credit rating driven. Right now, there’s a lot of choice in the market and we think the demand versus supply is more balanced now. At the same time, foreign investors’ participations have increased and will continue to grow in our view. There is obviously more reason for issuers to get a rating now, but one caveat is that transactions are rather small. It may not make a lot of sense for a company to get its first rating to sell an offshore renminbi of a small size. But as the market grows, it will be a lot easier for is-

suers to get demand for benchmark deals if they have ratings.

While credit ratings are useful as an independent ref-erence point of credit quality assessment, it is impor-tant to have internal credit analysts. Investors who do their own work can pick up value opportunities, and this is our core investment principle in credits. We are open-minded at looking at unrated bonds. However, for the market to grow we need to see more ratings.

EM: But covenant packages in the offshore ren-minbi bond market tend to be looser than those in the dollar market. Shouldn’t that be reflected in the rating?

Lau, Moody’s: From a rating perspective, we are look-ing at the credit quality of the underlying issuer. When an issuer uses a looser covenant package, in most cases, we are unlikely to change the rating unless it sits lower down in the capital structure.

Pratt, Barclays: We should be clear about how impor-tant ratings are in this market. We don’t always advise a client to get a rating. It’s a process. If it’s a debut private sector issuer and they don’t want to raise too much, they probably don’t need to get a rating as long as they have decent support from either PBs or Chinese banks. If the issuer is planning to sell a benchmark deal, not have a rating would likely have a much bigger effect on pricing.

Chung, Moody’s: We have had enquiries from several investors about whether a particular deal is going to get a rating, but they are really concerned when it’s a deal that’s high yield. Those are the issuers who really need to consider getting a rating.

Hui, Schroders: With more credit investors exploring opportunities in this market, investors will gradually demand transactions with proper covenant packages. This is a healthy market development but will take time. For us, we have the same credit research ap-proach to analyse both a offshore renminbi credit and a US dollar credit.

Hu, BOCHK: We have deep understanding of the domestic credit market in China and Chinese bond is-

suers due to our solid experience and vigorous internal credit rating process. While we are comfortable with our internal process, we welcome external credit rat-ings which would help further develop the offshore renminbi bond market.

EM: The key issue for companies considering this market is their ability to remit the proceeds of their bonds into China. How easy is the process of remittance?

Wang, China Resources: The main reason we tapped the offshore renminbi market was because of the low cost of funds available. Since it is renminbi-denomi-nated, you do not get the currency mismatch. That also means you don’t get the currency appreciation, but from a risk management perspective it is a good attribute for Chinese issuers.

We decided to launch an offshore bond partly because, back in November last year, when we ap-proached underwriters about selling a deal we rarely came across a clear answer to our questions. How do we go about issuing? What kind of procedures do we need to have in place? They didn’t really know, so we decided to do it ourselves and see what it was like.

We could have potentially sold more, but because the issue procedures are not well established, we want-ed to see what the process was like. It turned out in our case to run relatively smoothly, but it required some guts. We went into it without really knowing what the process was like and when we would talk to the regulators, they would tell us that they supported the development of the market. But what procedures were needed? They did not tell us.

You talk to the regulators and build confidence you can bring the money onshore, then you issue. It took us three months to remit our money, which we thought was actually quite an impressive result. We may be in a luckier position than a lot of other issuers, because we operate in 13 different provinces in Chi-na, and we could go around the provinces and decide which ones would be more familiar with the market.

But there is still no clear guide to how you remit your money. If I sold another offshore renminbi bond, I would probably be more prudent this time and approach the authorities first to get approval be-fore I issue.

ken Hu, BocHk aSSet ManaGeMent

Jon Pratt, BarclaYS caPital

EM RMB RT 2011.indd 6 13/09/2011 18:15


offshore Renminbi Bond Market Roundtable ¬ ¬ 7

EM: But to what degree can you get concrete per-mission in advance? Many issuers say they will get permission in advance, but is it possible to get a for-mal letter?

Wang, China Resources: You cannot expect to get a formal letter from the Chinese authorities. Next time, we will check with officials in the PBOC or SAFE (State Administration of Foreign Exchange) in advance and hear their views in principle on our bond plan. For example, what kind of size are government officials ac-cepting in principle?

Nobody, in my view, will ever give you a piece of paper in advance, telling you that you have permission to issue a certain amount of bonds. That just does not happen in China. But you can get yourself reasonably comfort-able by having discussions with the right peo-ple.

De Boursac, ASIFMA: There are some com-plications in this process. The first one is that the Chinese government are not used to giv-ing advance rulings. That is not how they do business.

The other complication is that if you’re working in different provinces, you need ap-proval from each provincial authority. The PBOC may give you approval, but you then need to go and get approvals from a number of provincial officials who may not be as familiar with the market.

The Ministry of Commerce could also have a say, depending on how the remittance of renminbi affects your capital structure. My understanding is that you may not actually need approval from the ministry at present, but you do need to notify them. That can be worse than asking for approval in many ways, because you cannot get a ‘yes’ but you can still get a ‘no’ later if they review the application and tell you they don’t like it. This makes it difficult to force a timetable.

We have been pushing to streamline the approval process, so at least the application process across differ-ent provinces could be standardized. At the moment, provinces ask a lot of different questions and if you have half a dozen factories in half a dozen provinces in China, you by definition have half a dozen appli-

cation processes, each with its own informa-tion requirements and standards.

It is important to improve this area of the market. Not many issuers will want to raise renminbi, which is viewed as an appre-ciating currency, if they have no use for it or cannot get remittance approvals.

Tang, Sinochem: Peo-ple talk a lot about the regulators and the issuing pro-cedures, but what the Chinese government are think-ing about is the important thing. There is no clear-cut guideline for companies to remit to Hong Kong, so companies need to get to know Chinese government officials. But the government is looking at making the process a bit easier.

The renminbi market is an immature market right now. The body that needs to approve your remittance can be different in different circumstances, and the feedback you get can be different. It may be SAFE that needs to approve your remittance; it may be the Peo-ple’s Bank of China; it may be the Ministry of Com-

merce. It is not always easy to tell in advance.We sold US dollar bonds in November last year, is-

suing a $2 billion dual-tranche bond. We only gave a request to the government to remit the money after we had issued the bonds. If we would have issued a request before, maybe we would have missed our window. It is easier to get approval to bring US dollars into the coun-try and convert them into renminbi than it is to remit renminbi, so you have more flexibility with timing in the offshore renminbi market.

Issuers should look for offshore uses of the renminbi. That would make the process of issuing — and picking the right timing — a lot easier.

Hu, BOCHK: That is a good point. We should see the offshore renminbi as a hard currency in itself. We are seeing growing trade settlements in offshore ren-minbi, and it will not be a surprise if soon we start to

see offshore renminbi is used as a hard currency for overseas M&A and commodities transactions. I see euro-renminbi to be a good term to describe the off-shore renminbi.

Wang, China Resources: The lack of use of renminbi offshore is limiting the amount of foreign issuers who will tap the market, but one day this will change and the cost of funds will go up.

EM: Is remittance one of the key issues stopping CLP from selling its first offshore renminbi bond?

Ho, CLP: We have no renminbi debt financing in our plan so far therefore we have not tried to get the respec-tive approval yet. We have enough retained earnings and other sources of financing to help finance our expan-sion. Renminbi for us would have a different purpose, if we ever raised it in Hong Kong. We are more inter-ested in remitting renminbi back to China so we can use offshore renminbi bonds as a form of debt in lieu of onshore borrowing. This form is most challenging.

We receive a lot of calls from banks about the off-shore renminbi market. Some banks tell us they think this can be done, others are more sceptical. But our experience tells us a bank would need to be very asser-tive to say they have a high level of comfort we can sell CNH bonds for the purpose of refinancing or replacing onshore debt. We understand from the banks that the

PBOC have no explicit policy saying this cannot be done, so it’s a matter for the au-thorities to decide whether they will favour this type of borrowing in the future, when and in what form.

That does not mean we will never issue offshore renminbi bond to remit to China in the form of a shareholder loan or alterna-tive debt financing. But we want to know the market better. If it is only limited to those two forms of financing, our interest will of course be limited. We would like to have more flexibility.

EM: Are maturities in the market long enough to attract you to issue?

Ho, CLP: We are in an infrastructure business with a long pay-off period, so longer-term debt suits us a lot better. We want to minimize our financial exposure. When the offshore renminbi market can be wider, deeper and still remain cost effective, we will make our move.

The most important three drivers of our offshore renminbi issuance are size, tenor and pricing. Given the pool of renminbi deposits in Hong Kong having exceeded RMB510 billion at end of April, I don’t think size is a major concern. We also think so long as the ren-minbi bonds can be reasonably priced, that will leave investors and issuers satisfied. But we want tenors to extend further.

Tenors are already increasing, and that is a welcome development, but the longest deals for corporations have been five years. We would like to see longer-dated

MaSon Wu, Prudence inveStMent ManaGeMent

“In order to attract more institutional investors to par-ticipate in this market, rating

will certainly help” — gary Lau, Moody’s Investor services

EM RMB RT 2011.indd 7 13/09/2011 18:16



deals become more frequent, and even closer to the 10-year range. It will take time but we think with the in-terest from market participants in Hong Kong we will reach that stage sooner rather than later.

EM: Can you give us a sense of foreign issuers in the market and when that is likely to increase? How attractive is the market for foreign issuers?

Pratt, Barclays: It is very attractive, but it’s the remit-tance issue that is holding many foreign companies back. Also, a lot of them have a lot of onshore liquid-ity, which is hard to move offshore, and they therefore do not have huge funding needs. A larger number of foreign companies would issue in the offshore renmin-bi market for diversification reasons if they could swap it back into another currency; that would definitely increase issuance activity from foreign companies Not until the swap market provides more competitive after-swapped funding, it is unlikely issuance activity will pick up dramatically from this client segment.

There is a real opportunity to expand the global in-vestor base by bringing more foreign issuers into the market. This will eventually happen if we see some more flexibility on remittance policies in China, a more liquid swap market and ongoing investor educa-tion. Central banks, for example, have a lot of inter-est in adding renminbi assets to their portfolios and diversifying away from US dollars and euros but they need a broader range of highly-rated, liquid bonds to invest in.

Leahy, Nomura: I agree with Jon that remittance is the big hurdle to attracting foreign issuers. This is the most exciting development in the capital markets that we have seen for a decade or more. But when potential issuers are talking to bankers and regulators, they will struggle to get a clear idea of the regulatory environ-ment. The catalyst for more foreign issuers coming into the market is clarity on the remittance process and development of a swap market to attract arbitrage-based issuers.

De Boursac, ASIFMA: We are pushing for an inter-est rate fixing which will help the development of the swap market. An official Hong Kong offshore renmin-bi spot fixing was introduced in June, but we also need an offshore deliverable renminbi interest rate fixing.

We hope that will be established before the end of the year, which would help market development a lot. As these fixings take hold, you will see more derivatives being created that reference the fixing price, and issu-ers will have access to more hedging options.

Hui, Schroders: Foreign investors’ interest in this mar-ket is likely to increase. Currency liquidity, in terms of converting from other currencies to offshore renminbi in the spot market, has improved significantly. Most bonds these days can be settled via Euroclear, which also help foreign investors to invest in offshore ren-minbi bonds. In terms of foreign issuers tapping into this market, this does not only help issuers to diversify their funding sources, it is also a great news for inves-tors like us. With credit research analysts in different geographical locations, we can explore relative value opportunities across different currencies. An offshore renminbi bond, swapped back to US dollars would offer more attractive value than the US dollar bonds issued by the same credit.

EM: What are Suez Environnement’s plans in the offshore renminbi market?

Turchini, Suez Environnement: We fund capital ex-penditure at the project level [for our joint ventures in China] through the bank market. We have funded equity and shareholder loan injections into our China entity with a Hong Kong dollar syndicated loan facili-ties. This is a very efficient way for us to fund, because the funding costs are very low.

We like the idea of improving our asset and liability management, even though we have benefited from the appreciation of the renminbi. We are attracted to this market, but as other have mentioned already, there are some problems.

We have immediate visibility on the development pipeline for our projects. Our projects develop very quickly, say in three to six months, so it is difficult for us to plan very long in advance to get approval from SAFE and the PBOC. We are cautious about raising renminbi and not being able to remit it onshore.

That said, we are looking at the development of the market with excitement. One way we could use ren-minbi is to refinance our Hong Kong dollar debts. This would increase upfront our cost of funding, but it could be a way of matching our assets and liabilities more ef-

fectively onshore. We think that eventually this market will be one of the ways to.

EM: Can you see other companies taking this route, paying back foreign currency debt with off-shore renminbi loans?

Pratt, Barclays: A number of offshore companies are not prepared to go ahead with offshore renminbi bonds because there is a nice carry trade at the moment from funding their Chinese investments offshore in other currencies, whether it’s HK dollars, US dollars or oth-erwise. That means issuers will be more interested in selling bonds offshore when the currency is not appre-ciating as quickly, while investors are going to be less confident at that point. Paradoxically, we need to see a period of uncertainty about the currency before more issuers come.

EM: How important for the internationalization of the renminbi is it to create clearing banks outside of Hong Kong? Does the offshore business need to move out of Hong Kong to really become interna-tional?

De Boursac, ASIFMA: Hong Kong will maintain its dominant role in the offshore renminbi market, fun-damentally because of the ‘one country, two systems’ model. It is going to be one country and one system in 36 years, so it makes sense for the bulk of offshore renminbi activity to remain in Hong Kong.

The growth of this market will be gradual, and the Chinese government wants to be very careful with each new step it takes to avoid problems. China clearly has a good relationship with the Hong Kong Mon-etary Authority, and that helps them keep the market under control. While I’m sure that the Monetary Au-thority of Singapore also has a very good relationship with the PBOC, it is not the same thing. They are not part of the same country. I think the bulk of offshore renminbi activity will stay in Hong Kong for some time to come.

The clearing bank is the link between the offshore and onshore markets and allows the government to ap-ply controls to currency transfers. You either have no transfers, some controls on transfers or no control. We have moved away from a time when China allowed no transfers, but they still need controls. EM

nicHolaS de BourSac, aSiFMa

tanG zHi Jin, SinocHeM HonG konG (GrouP)

WanG Xiao Bin, cHina reSourceS PoWer HoldinGS

EM RMB RT 2011.indd 8 13/09/2011 18:16

offshore renminbi: the bond market in depth · hong kong, august 2011 2 ¬ ¬ offshore renminbi...

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