The People’s Bank of China, the mainland central bank, cut its reserve requirement ratio for local banks by 50bp over the weekend, reducing the amount of capital lenders need to hold with the central bank.
The move was designed to stimulate the economy, and appeared a better option than an interest rate cut for policymakers who are still worried about inflation. But it risks further narrowing the gap between onshore and offshore renminbi funding costs, and thereby cutting the incentive for local companies to issue dim sum bonds.
The difference between onshore and offshore borrowing costs has fallen to between 80bp-100bp recently, from 250bp a year ago, as yields in China have fallen, according to a Hong Kong-based analyst. That could make a big difference to the number of Chinese issuers heading offshore for funding, but there are reasons to be optimistic.
After all, even if lending is boosted in the mainland, it will mainly go to Chinese state-owned enterprises, blessed by the government — and thereby favoured by the country’s lenders. Property developers and other high yield companies will still want to turn offshore for funding, keeping up heavy supply near the lower-end of the curve.
And for their part, state-owned enterprises will still keep up a strong supply of dim sum bonds, even if they get a borrowing boost at home. That is because the development of the offshore renminbi market is a key part of the government’s plans, and state-owned enterprises have been told, according to DCM bankers, to become regular borrowers in the market.
Issuance volumes will also be helped by an increasing number of foreign issuers. Germany’s KfW raised Rmb1bn ($158m) from its debut offshore renminbi issue this month, becoming only the latest foreign issuer in the market this year, after deals from América Móvil, HSBC, Emirates NBD and Raiffeisen Bank International. Those from outside of Hong Kong and China face a regulatory minefield if they want to fund in the mainland, so greater divergence between offshore and onshore rates means little to them.
The market, then, should be able to easily withstand looser lending on the mainland. The recent cut may look like bad news, but the dim sum market is resilient enough not just to survive, but prosper. It is too important to China’s ambitions to do anything less.