China: Dim sum fever leaves investors starving for yield

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By:
Lawrence White
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Unilever prices just over 1%; Renminbi IPO in HK meets caution

RMB Offshore (Dim Sum) Bond Bookrunner Ranking
2011 YTD
Bookrunner parentsDeal value ($mln)No.% share
1HSBC672830.5
2Deutsche Bank287213.0
3CITIC Securities264112.0
4DBS16927.7
5RBS12435.6
6JPMorgan9914.5
7Haitong Securities9614.3
7Bank of China9614.3
9Bank of Communications7613.5
10ING7013.2
Source: Dealogic
The mismatch between investor demand and the supply for renminbi-denominated debt issued in Hong Kong is driving yields ever lower. The three multinational companies to have tapped the market so far offer clear evidence of the trend: the first, McDonald’s Corporation, issued three-year paper in August 2010 at 3%. Next came Caterpillar in December with a two-year note at 2%. Then, in March this year, Unilever came to the market with a three-year deal yielding just 1.15%.

Issuers are able to achieve such tight spreads in the fast-growing market because of the lack of supply relative to demand. Until the market opened in Hong Kong, investors with excess renminbi funds had little choice but to park them in low-yielding deposit accounts. The total of these deposits has been rising rapidly. According to Standard Chartered Research, the total amount of renminbi outstanding in Hong Kong now is about Rmb280 billion ($43 billion), up from HSBC’s estimate of Rmb150 billion last September. Standard Chartered foresees a base situation in which mainland importers settling trade in renminbi and mainland tourists spending renminbi in Hong Kong combine to force deposits to rise at a compound annual growth rate of 70%, meaning a total of Rmb4.5 trillion by 2015.

Whether that projection plays out or not (it is the more conservative of the three the bank proposes), the situation now is that Hong Kong depositors are accumulating Chinese currency faster than issuers are providing them instruments to invest that money in. As of September 30 last year, according to HSBC, Rmb150 billion in deposits chased just Rmb40 billion in outstanding renminbi-denominated paper in Hong Kong. That ratio is not much changed.

Tight prices

With pricing so tight, why are more issuers not rushing to fill the demand for renminbi debt in Hong Kong? The deals, known somewhat unfortunately as dim sum bonds, offer a means of raising funds in a currency widely expected to appreciate, at a price lower than the onshore rate. The question they face is what to do with the proceeds.

"The key factor for corporate issuers in deciding to tap the dim sum bond market," says Gina Tang, head of Hong Kong and China debt capital markets at HSBC, "is whether they can get the funds back onshore. Multinationals are becoming more comfortable with this process, which has become easier than it was six months ago, but things are still decided on a case-by-case basis."

Despite the great deal of publicity this new bond market is attracting, the deals are very small by international standards. Chinese issuers are pricing some larger transactions, as with state-owned Sinochem’s $527 million deal on January 11, but non-Chinese companies are raising relatively tiny amounts. The Unilever deal raised the equivalent of just $46 million. Bankers acknowledge that these deals are more about winning credit in Beijing and winning publicity for the issuer than they are about raising serious amounts of funding.

Benchmark

The lack of a benchmark curve in the fledgling market means the deals have to be priced on a case-by-case basis. HSBC’s Tang says: "Pricing these deals involves looking at the outstanding ministry of finance offshore curve, and where new issuers of a similar credit quality have been coming in recently. Highly rated issuers are able to come around low 1% for three-year tenor at the moment, which shows how much demand there is."

The market is likely to grow rapidly despite issuers’ concerns about the difficulties in getting the funds back onshore, simply because the development of Hong Kong as a hub for the Chinese currency is part of Beijing’s plan to internationalize the renminbi. The development of the dim sum market and the increasing amount of trade being settled in renminbis form a feedback loop in which the growth of each trend encourages the other. On April 20 Hong Kong tycoon Li Ka Shing’s Hui Xian real estate investment trust priced an Rmb10.48 billion IPO, becoming the first issuer to pull off a Hong Kong listing in the Chinese currency. Investors responded to the deal cautiously, meaning it priced near the bottom of the expected range, but more deals are likely to follow.

Top 10 RMB Offshore (Dim Sum) Bond Deal List
By deal value, 2011 YTD
Pricing dateIssuerDeal nationalityDeal typeDeal value ($mln)Deal bookrunner parent
11 Jan ’11Sinochem Offshore CapitalChinaCorporate bond investment-grade

527

Deutsche Bank, Citic Securities
06 Apr ’11Singamas ContainerHong KongCorporate bond investment-grade211ING, RBS, DBS
18 Feb ’11Road King Infrastructure Finance (2011) ChinaCorporate bond high-yield197JPMorgan, DBS
14 Apr ’11Zhongsheng GroupChinaCorporate bond investment-grade191Haitong Securities, Bank of China
15 Feb ’11Beijing Capital Land InvestmentsChinaCorporate bond high-yield175HSBC
01 Apr ’11HKCG (Finance) Hong KongMedium-term note122HSBC
29 Mar ’11China WindPowerHong KongCorporate bond high-yield114HSBC
25 Jan ’11PCD Stores ChinaCorporate bond high-yield114HSBC
19 Apr ’11United Asia FinanceHong KongCorporate bond investment-grade77Standard Chartered Bank, UOB
07 Apr ’11Shandong Chenming Paper HoldingsChinaCorporate bond investment-grade76Bank of Communications
Source: Dealogic