China Development Bank (CDB) is believed to be selling Rmb3 billion (US$439 million) worth of two-year notes next month, after sales by HSBC and Bank of East Asia. Bank of China has also just gained approval to sell up to Rmb10 billion of bonds in Hong Kong, although no timing has yet been announced.
China’s banks have been issuing bonds ever since the Chinese regulators began allowing them to do so in mid-2007. Since then CDB and four other Chinese banks have sold Rmb22 billion-worth of renminbi bonds to Hong Kong institutional investors.
While this is a miniscule compared to the amount that the banks have issued onshore, it still marks the promise of a new market. The willingness of China’s regulators to promote renminbi bonds in Hong Kong was underlined when they approved the mainland subsidiaries of HSBC and Bank of East Asia (BEA) to sell two-year renminbi bonds in Hong Kong in May. The former sold Rmb1 billion of bonds on June 25 and a few days later, BEA announced a Rmb4 billion deal paying 2.8%
Investors have not been deterred by the relatively low coupons of the bonds. This is partly because the renminbi’s value is expected to further appreciate, while there remains a limited supply of such debt outside China.
“Hong Kong and Chinese financial institutions have been very popular and investors have faith in these two economies, so even though these banks are issuing at very tight spreads you still see many willing takers,” said a debt banker in Hong Kong.
China’s recent decision to begin a trial programme to allow cross border trade settlement in renminbi in Hong Kong could also accelerate the opening of the mainland’s capital markets, and promote more renminbi bond issuance in Hong Kong.
It would make sense. Foreigners who hold renminbi from their settlement will want more investment products, but China is likely to only open its domestic capital markets gradually. A sensible compromise to attract interest in renminbi trade settlement would be to expand the offshore renminbi bond market instead.
“Expanding renminbi bond issuance and trading will be the first option, especially the promoting the issuance of different tenors because up to now, the duration of issues have mainly been two to three years,” noted Qu Hongbin, China economist at HSBC in Hong Kong in a July 6 report.