Debt markets: Dim sum market is a side dish

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What multinationals really want to know: when can we issue debt on the Chinese mainland?

Disregarding concerns about the rather patronizing name that has been thrust on Hong Kong’s renminbi-denominated bond market, the real problem with the introduction of the dim sum sector is that it has distracted attention from much more pressing concerns related to China’s debt markets. The option to issue offshore in renminbi had been restricted to Chinese companies until last year, when pioneering offerings by companies including McDonald’s and Caterpillar made the headlines. The former was the first multinational to take advantage of the new mechanism, via an Rmb200 million ($30 million) deal in August; Caterpillar Financial followed in November with an Rmb1 billion two-year note yielding 2%.

These deals have generated much excitement in Hong Kong, especially at the debt capital markets desks of foreign investment banks and among law firms with China expertise who foresee a bonanza in advisory fees. The appetite for renminbi-denominated paper in Hong Kong is certainly big among local investors with holdings of the mainland currency but who previously had no channel for investing these funds.

Yet there are reasons why these developments are not as exciting as they might appear. First, the deal sizes are still very small: Caterpillar’s deal is the largest so far, dwarfing the McDonald’s bond, yet still only raised the equivalent of about $151 million: a significant sum, but hardly a benchmark issue. The total volume of renminbi deposits in Hong Kong has grown rapidly since 2007 but still amounts to only about Rmb105 billion. Banks that have tested the new market have done so in extremely tentative amounts, such as China Development Bank’s Rmb500 million bond. They are, as the treasurer of another bank that has issued funds in the new market admits, testing the waters rather than raising big capital sums.

Secondly, there have been problems in using the funds once the deals are done: market sources say that McDonald’s ran foul of a regulatory problem and experienced delays in transferring the renminbi from Hong Kong, where it was raised, to the mainland, where it was needed. Bankers who are working on dim sum deals at the moment say that these were merely teething troubles and that the approvals process is now more transparent. However, they still concede that there is no clearly expressed written set of rules for the process or an explicit timetable for the execution of such a deal. Approvals are likely to be granted on a case-by-case basis.

Finally, the dim sum market is a distraction from the lack of development in China’s debt markets that global issuers are really interested in: the panda bond market – foreign issuance in renminbi directly on the Chinese mainland. For companies wanting to raise renminbi for expansion in China, raising the funds in Hong Kong and then moving them to the mainland will become a pointless hurdle once the current scarcity arbitrage disappears. As many of these issuers acknowledged in private at Euromoney’s China capital markets conference in Beijing in November last year, while they are interested in issuing in Hong Kong they are passionate about issuing on the mainland should the rules for doing so be sorted out. While Shi Wenchao, executive vice-president at regulator NAFMII, made encouraging noises about opening the domestic bond market to foreign issuers at this event, other leading Chinese bankers were somewhat reticent when asked for their thoughts from the floor.