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Capital Markets

China: Dim sum bond is offered first on London’s menu

HSBC launch demonstrates UK appeal; Deal criticized as PR exercise

When someone speaking Cantonese talks about going out to eat dim sum, they say "yum cha", which translates to "drink tea", as the tasty food parcels are generally washed down with a brew or two.

Perhaps it was inevitable then that the first dim sum bond to be issued outside a sovereign Chinese territory was in London, where drinking tea – inside Euromoney headquarters and across the City – is a serious business.

The Rmb2 billion ($317 million) renminbi bond issue by HSBC, although relatively small and, according to some, too expensive for HSBC, marks a new chapter in the expansion of the Chinese capital markets.

At least two Chinese banks, along with a large European retailer, are reported to have been readying RMB bonds of their own in London. But HSBC stole a march on them.

PR stunt

Rival bankers criticized the HSBC deal, saying it amounted to a public relations exercise and was not particularly meaningful.

Doubts about the characteristics of the bond itself aside, the launch is undoubtedly a key moment for London in its competition with several other global hubs for business from China. It also underlines the growing importance of the renminbi, as a global business currency that seeks to rival the US dollar.

The HSBC bond comes as authorities in the UK and China establish a group of banks to support the growth of the London renminbi business. The group, brought together by the City of London, has published a paper outlining ways in which London might establish itself as the ex-China centre of choice for renminbi business.

A broad range of renminbi-denominated products and services in the interbank, institutional, corporate and retail markets are already on offer in London, according to the report.

A survey conducted as part of the report says the total value of London deposits is Rmb109 billion ($17.3 billion) – made up of Rmb35 billion in customer deposits and Rmb74 billion in interbank deposits. The total volume of CNH customer deposits in Hong Kong in December was Rmb589 billion.

Wenjian Fang, chief executive of Bank of China in the UK, says: "This is an important step in the process of encouraging the increased use of the renminbi outside China. The initiative will strengthen London’s position as a global financial centre."

The fact that HSBC launched the bond in London demonstrates the continuing appeal of the UK’s capital due to its time zone, with a working day that overlaps that of China and the rest of the world, from Brazil to Japan.

The launch, which attracted lots of interest from European and Asian enterprises from different parts of the investor spectrum, is expected to pave the way for several other banks, including Chinese banks.

cost to UK importers of not using renminbi to pay Chinese trade partners
cost to UK importers of not using renminbi to pay Chinese trade partners

The bond also coincided with China’s decision to widen the renminbi/dollar band, a move designed to further open up the capital markets of China to the rest of the world. London and Singapore are emerging as the two most liquid markets for renminbi business beyond China and Hong Kong, although both remain in their nascent stages.

The reluctance of UK importers to pay Chinese trade partners in renminbi is costing them £180 million ($291 million) a year in unnecessary fees, according to a report by Western Union Business Solutions.

The survey of 1,000 Chinese businesses shows more than a third would rather be paid in renminbi, with 23% of those asked naming exporter convenience and reduced FX risk as the main drivers for this preference.

Paul Gooding, who leads HSBC’s efforts to establish London as an offshore renminbi centre
Paul Gooding, who leads HSBC’s efforts to establish London as an offshore renminbi centre

Paul Gooding, who leads HSBC’s efforts to establish London as an offshore renminbi centre, credits UK chancellor George Osborne, commenting at the Asian Financial Forum in January, with putting the issue of expanding London’s renminbi presence in the spotlight. Market development

"When people talk about the need to establish London as a market centre with respect to Chinese trade, they tend to talk about a time frame of three to five years," he says. "But the next six months to a year are going to be key, and the main thrust of our efforts will be around education and marketing."

Gooding adds that the business itself must be built from the bottom up. "You have to grow this business through trade and you need to tell investors why they should be paying in renminbi," he says.

Demand for the HSBC bond was encouraging, in terms of the type of participant, according to Gooding. "We were pleased with the quality of the book," he says. "There was a range of the most active private banks, asset managers and hedge funds. This market reminds me a little of the Eurobond market in its early days. The next step will be the involvement of brokers and that will deepen the liquidity of the market."

One head of strategy at a large Chinese brokerage says London is well positioned to expand as a renminbi hub.

"London could become more important than Hong Kong, which is essentially just a regional market," he says. "Over the next three to five years, London could become very important indeed."