By Elliot Wilson
China Development Bank’s (CDB) Rmb5 billion sale of yuan-denominated debt in the Hong Kong market on June 26 was a trailblazing deal for Beijing, and a great leap forward for the country’s long-moribund debt capital markets. It marked the first sale of bonds in the Chinese currency in Hong Kong, and a significant coup for CDB, the country’s largest and most influential policy lender and a long-time supporter and promoter of the country’s debt markets.
CDB targeted the two-year bonds, which carry a coupon rate of 3%, at both foreign institutional and retail investors. The deal’s joint lead managers and bookrunners, HSBC and Bank of China (Hong Kong), dragged in Rmb14 billion-worth of orders, with the retail tranche garnering more than 60,000 applications.
Some saw the deal as typically symbolic – China rarely launches new financial instruments without having a political or diplomatic reason to do so. Indeed, during the launch ceremony, Chen Yuan, the governor of CDB and one of the country’s most respected financial figures, noted that the sale had “coincided with the tenth anniversary of Hong Kong’s reunification with [China]”, making the transaction “particularly meaningful for us all”.
Others hoped that the new financial instrument would boost Hong Kong’s financial sector. Ma Delun, assistant governor at the People’s Bank of China, noted at the launch ceremony in Hong Kong that the “issuance of Renminbi bonds...will strengthen Hong Kong’s status as an international financial centre.”
Stephen Williams, the Hong Kong-based co-head of global capital markets at HSBC, says the deal worked well. “There were a lot of regulatory approvals [needed] on all sides, and a lot of work went into it. We priced it at the tight end of the range, and it tightened a bit more after that.”
Analysts and traders expect more Chinese commercial lenders to enter the market next year, selling debt in Hong Kong to raise cash to support domestic and foreign commercial activities. HSBC’s Williams notes that there “seems to be more desire on behalf of the Chinese authorities to get more issuances done. You have a thriving Hong Kong dollar [debt] market, and steady build-up in Renminbi deposits in Hong Kong, so why not create another asset class for institutions and for investors?”
For Beijing’s regulatory bodies, the CDB deal was a no-brainer on many levels. It allowed China’s top policy lender to tap foreign institutional and retail investors for cash, providing a good yield to investors while being able to control the roll-out of a nascent overseas market for yuan-based debt.
Secondary trade gap
Control is the key word here. Bankers involved in the deal highlight the lack of secondary trading. “There’s not much to trade, really, not yet,” says one. “People will buy and hold. But as more sales come in next year from other commercial banks, we will see some trading.”
Therein lies an issue for Beijing. For all of the excitement surrounding this deal, it does highlight the country’s enclosed approach to debt. No banker or trader interviewed for this story believes that it moves China a single inch closer to full or even partial currency convertibility.
Likewise, while the debt was made available to foreign investors, mainland-based investors were kept out of the loop. China remains fearful of allowing too much speculation in debt sold by mainland banks and traded by outside institutions. That would mean losing control of the process, and there’s nothing that Beijing hates more.
As one Beijing-based debt banker asks: “Why aren’t there any bonds denominated in the Renminbi but settled in dollars? You see issuances in Turkish lira, the Icelandic kronur and the Botswana pula, so why not in the Chinese currency? The reason is that foreign financial institutions are afraid to do this because it would piss off the Chinese by distorting their currency and fuelling appreciation of the Renminbi.”
Indeed, over the past few months several supranational bodies, notably the Asian Development Bank and the IFC, have looked seriously at issuing yuan-denominated debt in Hong Kong. As one banker notes: “The reaction by Beijing to each of these approaches has been consistent: a firm but polite ‘go away’.”
Yet for now, China Development Bank stands head and shoulders above other mainland financial institutions when it comes to understanding the long, slow and often tortuous developments of China’s debt markets. The Beijing-based policy lender has long been the country’s second-largest issuer of debt, behind the ministry of finance (which also fully owns CDB), and its vice governor, Gao Jian, is widely viewed as the father of China’s debt markets. Interviewed previously at his office in Beijing’s Xicheng district, Gao bemoaned the pedestrian development of the country’s debt markets – yet June’s offshore sale shows that China is finally moving quickly in the right direction.
Joining in
Since the CDB deal was completed, other institutions have joined the fray. In August, the Export-Import Bank of China (China Exim), the country’s second-largest policy lender, issued Rmb2 billion-worth of bonds in Hong Kong, an issuance that was 1.6 times oversubscribed. Sources close to the deal say CDB and China Exim had vied to be the first institution to sell yuan debt in Hong Kong, with the former leaning on its greater political connections and considerable industry experience to win the fight. China Exim gracefully agreed to delay its own sale by a couple of months.
In late September, Bank of China (BOC), the country’s oldest bank, also became the first commercial mainland lender to sell yuan-denominated debt offshore in Hong Kong. BOC sold Rmb3 billion-worth of Chinese currency-linked debt in two tranches, one comprising two-year bonds with an annual interest rate of 3.15%; the second making up three-year bonds paying 3.35%. Both issuances mirrored CDB’s bond sale in being available to both institutional and retail investors.