China: Two steps towards internationalized renminbi

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By:
Lawrence White
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Hopewell, Citic Bank issue in Hong Kong; Interbank market, investment products launched

Two issuers took advantage of Beijing’s continuing drive to internationalize the renminbi, using the looser restrictions on offshore issuance to complete debt deals in Hong Kong last month.

Hopewell Highway Infrastructure became the first non-mainland-domiciled corporate to issue renminbi-denominated bonds outside the People’s Republic when it raised Rmb1.38 billion ($203 million) in two-year notes, with Bank of China acting as sole bookrunner. The company, a Hong Kong-based toll road operator, will use the funds to help finance the construction of an expressway in China’s Pearl River delta region.

The other deal involved Citic Bank International (CBI), the Hong Kong subsidiary of China Citic Bank, issuing the first-ever offshore renminbi certificate of deposit in the form of a $500 million one-year note with a coupon of 2.68%. HSBC acted as sole bookrunner of the deal. Woody Chan, treasurer of CBI, said in a statement that the funds would "enhance [CBI’s] working capital for trade finance and optimize [our] Rmb asset and liability position".

"The deposit base for renminbi in Hong Kong stands at around Rmb85 billion now, and could reach Rmb100 billion by the end of the year"

Gina Tang, HSBC

The deals are further milestones on the path towards internationalization of the renminbi via the development of viable offshore bond markets in the currency.

The Hopewell deal is particularly significant because the issuer was a non-bank entity, and while the overall amounts raised were comparatively small in both deals, their successful completion will reassure authorities in Beijing and Hong Kong that there is appetite for further such issuance.

Asked about the potential size of the renminbi bond market in Hong Kong, Gina Tang, head of debt capital markets for Hong Kong and China at HSBC, says: "The deposit base for renminbi in Hong Kong stands at around Rmb85 billion now, and could reach Rmb100 billion by the end of the year. Issuance from mainland institutions this year is expected to total Rmb10 billion to Rmb15 billion, and then offshore issuers might add another Rmb5 billion or so in total."

Liquidity holders

The investor base for renminbi deals in Hong Kong consists for now almost exclusively of banks, says Tang, because they hold the bulk of the renminbi liquidity.

The Hopewell and CBI deals followed the People’s Bank of China and the Hong Kong Monetary Authority’s announcement on June 13 that they were expanding the pilot scheme to allow cross-border renminbi trade settlement.

The original scheme was restricted to counter­parties in Hong Kong, Macau and Asean countries, and to five cities in China. It now covers companies in all countries globally and 20 provinces in China. According to HSBC, the global volume of renminbi trade settlement has jumped from Rmb2 billion in the second half of 2009 to more than Rmb10 billion in March 2010.

The pace of the internationalization project increased again with another announcement by the same two authorities on July 19. The key development in this instance is that corporate and non-personal customers are now allowed to open renminbi accounts with authorized institutions in Hong Kong, and that there is now no restriction on the transfer of renminbi funds between accounts in Hong Kong.

Interbank market

This in effect creates an interbank market in the Chinese currency in Hong Kong, and paves the way for the creation of offshore renminbi-denominated wealth management products. Banks can offer any kind of renminbi investment product they want, bar the offering of loans in the currency to personal customers.

Transaction volumes under the renminbi cross-border trade settlement

Source: PBoC, HSBC


Banks in Hong Kong immediately began offering renminbi-denominated investment products, with HSBC launching renminbi FX-linked deposits on July 20 and Standard Chartered Bank offering retail and wholesale clients structured products tied to the performance of an index and paying out interest in renminbis. Citic Bank has launched time deposit rates in renminbis offering up to 1.8% a year, and more local banks are likely to follow the trend of offering renminbi products both as a way of attracting new business and to curry favour with the authorities in Beijing and Hong Kong by supporting their current priority project.

These developments will encourage the growth of renminbi settlement and thus the internationalization of the currency by providing an offshore vehicle for the storage of renminbi earnings. HSBC estimates that within three to five years China will settle half of its trade with non-G3 economies in renminbis.

Update -
FX news: Chinese central bank opens up bond market to foreign investment
weeklyFiX August 17 2010