Formosa Bond Roundtable: Breaking into the mainstream
Taiwan's Formosa bond market has taken off in 2015, helped by regulatory changes and a favourable cross-currency swap. Issuers from all over the world have flocked to take advantage of keen investor interest in the asset class, with foreign financial institutions particularly active in bringing new renminbi-denominated deals. Carrie Hong, editor of GlobalRMB, a sister publication of Asiamoney, discusses the recent developments in the market and its future prospects with a group of key participants representing issuers, investors and intermediaries.
Sarah Chen, head of fixed income, treasury division, E.Sun Bank
Richard Liu, vice president, bond department, Taipei Exchange (TPEx)
Eddy Lui, regional head of global markets for Greater China, global banking, Maybank
Carol Tao, assistant general manager of fixed income section, treasury department, Bank of Taiwan
Yvonne Tsai, senior vice president, fixed income products division, Cathay Life Insurance
David Wang, CFO, Far Eastern New Century Corporation (FENC)
Moderator: Carrie Hong, editor, GlobalRMB
Carrie Hong, GlobalRMB: Issuance of Formosa bonds and international bonds in Taiwan has attracted a lot of attention from bond market participants around the world. So far this year, according to our estimate, 27 RMB bonds have been issued in Taiwan with a total volume of Rmb17bn ($2.7bn), which almost equals the whole year's issuance in 2014. The dim sum bond market is weakening and many investors in Mainland China are beginning to show interest in the Formosa bond market.
Let's start our discussion with Taipei Exchange. Over the past two years, the exchange has been working very hard to promote the issuance of international bonds in Taiwan. Last year it relaxed market regulations. This year it changed its English name from the GreTai Securities Market to Taipei Exchange. What was the reason for this change?
The reason for choosing Taipei was because most of our peers derive their names either from the name of their country or of their city. To avoid confusion with the Taiwan Stock Exchange Corporation, we chose to rename the company as Taipei Exchange.
As our trading activities are not limited to securities only, we do not include 'securities' in our English title. In Taipei Exchange all kinds of securities can be traded, and we also have different boards. Fixed income products as well as derivatives, such as interest rate swaps, bond forwards, and some other option products, can also be traded. We also launched a gold trading platform and a trading platform for mutual funds.
Hong, GlobalRMB: Can you outline the listing activities of international bonds and Formosa bonds in Taiwan over the past two years?
Liu, TPEx: Starting from 2005, we began to see the listing of international bonds here in Taiwan, but the timing was not right, because demand was not there. We’ve made many changes since 2012, after the RMB clearing bank was set up by China’s central bank, and companies were allowed to issue Formosa bonds in Taiwan in 2013. At the very beginning, the issuance volume was quite small. In order to promote the issuance of Taiwan renminbi bonds, we created a specific board for them.
In addition, some regulations are now relaxed. Before the launch of the Financial Import Substitution Program, life insurers’ overseas investment was subject to a stricter investment cap. The removal of foreign currency bonds issued in Taiwan from life insurance companies' 45% overseas investment cap has contributed to an increase in investment from Taiwanese lifers in the Formosa bond market and the dollar-denominated international bond market.
At the same time, the liquidity of the secondary market has also been increasing as the issuance volume increases. For broker-dealers, trading hours can now be extended. They are no longer limited to trading from 9am to 3pm every day, but can trade 24/7 to cater for the international investors. The flexibility has been greatly expanded.
Hong, GlobalRMB: For foreign companies to issue RMB bonds in Taiwan, underwriters play a very important role. Sarah, as an underwriter, what changes have you seen in terms of issuance of RMB bonds?
Sarah Chen, E.Sun Bank: This year the Financial Supervisory Commission (FSC) launched the Financial Import Substitution Program in order to attract more investment activity from overseas to Taiwan. Taiwanese underwriters typically lack the experience in underwriting international bonds, so it is very important for them to learn to bridge the communication between domestic investors and RMB bond issuers from overseas.
Local underwriters in Taiwan used to mainly focus on the local market. They have not been very good at bridging the local investors and foreign issuers in terms of changes in daily market prices, policy and regulations, and investor intentions. In the past year, underwriters — be they banks or securities companies — have changed a lot because they have to be in line with the international market. Taiwanese underwriters have to learn some best practice so that they can strengthen their business activities. In the past year, we have observed a huge change in Taiwan's local underwriters. We hope that this change will help Taiwan's underwriters go global.
Hong, GlobalRMB: Sarah mentioned that we have witnessed a lot of changes. This year, in particular, we have seen many foreign companies coming to Taiwan to issue RMB bonds and international bonds. For some companies it was their first time issuing RMB bonds in Taiwan; for others, it was their first time issuing them anywhere.
Maybank is one issuer that chose Taiwan for its debut RMB bond. Eddy, what were the reasons for this? What were the benefits of choosing Taiwan as your target market?
Eddy Lui, Maybank: In 2015, we aim to establish a Greater China RMB hub in Hong Kong. We have never issued any Dim Sum bonds in Hong Kong before, but we chose Taiwan to issue our first RMB bond because Maybank has good connections with many Taiwanese local life insurers.
After we issued our first dollar-denominated bond in Taiwan in 2014, many life insurers and banks approached us and asked us if we would like to issue RMB-denominated bonds. That is why we chose Taiwan to be our target market to issue our first RMB bond.
Of course, we would like to promote our company here in Taiwan. We are grateful for Taiwan's local life insurers and banks for their support in purchasing our bonds.
Hong, GlobalRMB: Compared with issuing RMB bonds in Hong Kong, Singapore, or Malaysia, what are the benefits of choosing Taiwan in terms of pricing and ability to raise funds?
Lui, Maybank: Buyers focus on the yield return, while sellers focus on credit spread. In terms of RMB bonds, we do not think that the credit spread of Dim Sum bonds would be as favourable as that of Formosa bonds, so we will continue to issue RMB bonds in Taiwan.
Hong, GlobalRMB: Most of the issuers of RMB bonds in Taiwan have been financial institutions. Would it be possible for non-financial companies from Malaysia to come to Taiwan to issue RMB bonds in the second half of this year?
Lui, Maybank: Yes. In March this year we took some Malaysian SOEs to Taiwan for a non-deal roadshow. Maybank is the largest bank in Malaysia. We contacted our business partners, and they have shown great interest in issuing RMB bonds in Taiwan.
Hong, GlobalRMB: David, Far Eastern New Century (FENC) was the very first non-financial company to issue Formosa bonds, in May 2013. First, I would like to know why you decided to issue an RMB-denominated bond. Secondly, the Formosa bond market has been booming this year, but FENC has been absent. Are you looking to issue more RMB-denominated bonds in the second half of the year?
David Wang, Far Eastern New Century: FENC has been an active participant in Taiwan's capital market, especially the bond market, for more than 60 years. Around 1989 or 1990, we issued Taiwan’s first convertible bond. We also issued a GDR in 1991. Since then, we have engaged in a lot of activities related to equity-linked securities. We consider this to be part of our responsibilities because we were one of the only two companies to have issued bonds here in Taiwan back to 20-30 years ago. We have paid very close attention to the development of the bond market.
Two years ago, we became the first non-financial company to issue a Formosa bond. I think that the reasons behind our decision are a very important reference for the future development of Formosa bonds. From the perspective of a company, if it wants to issue a bond, especially an RMB-denominated bond, it needs to clearly understand the use of proceeds of such issuance. FENC has had a substantial investment in Mainland China, so we have always had the need to raise RMB in order to facilitate our operational and capital expenditures in Mainland China.
Two years ago, we first thought about raising capital in Mainland China. However, the interest rate was quite high. Even a one-year loan had an interest rate of 6%-7%. Our second option was a Dim Sum bond. However, investors in Hong Kong were not familiar with issuers from Taiwan, and the all-in cost was also on the high side. In 2013, Taiwan started to promote deposits in RMB. The market began to grow, and OBU interest rates were also rising. As a result, the total deposits reached Rmb60bn and the environment was suitable for issuing RMB bonds to digest those deposits. Around that time, the Taipei Exchange and the authorities were proactively promoting Formosa bonds. As such, we decided to issue our very first Formosa bond.
Ten years ago, the RMB was appreciating, so many companies at that time were borrowing in dollars, using a currency carry trade to enhance profits. In 2013, however, RMB began to fluctuate. As a result, many companies resorted to issue RMB bonds as a hedging tool. Since companies had a large amount of borrowing in US dollars, and the RMB was no longer as strong as it had been previously, it was reasonable for issuers to think about issuing bonds in a weaker currency. On the opposite side, investors wanted to see a stronger RMB so that they could make gains in both currency and interest rate. Under these circumstances, it was crucial to find a balanced view between issuers and investors.
At that time, it was believed that RMB would continue to appreciate, which would be good for investors. But from a hedging point of view, we believed the RMB would depreciate and it could be an opportunity to issue RMB bonds. We did not consider a RMB loan in China because the interest rate was high and the Dim Sum bond market was not attractive. As a result, we started thinking about issuing RMB-denominated bonds in Taiwan. The timing was just right because the authorities were actively promoting the market. We finally issued Rmb500m.
Because our financials are consolidated, it was no problem for us to direct the money that we raised through RMB bonds to pay off the offshore USD debt. In a way, it was a tool for us to hedge against risks. I think that the timing was also right for issuers. Two years ago, we issued the Formosa bond at an exchange rate of Rmb6.14 to the dollar, and it is now Rmb6.20. As we were the first non-financial company to issue a Formosa bond, we were able to price at an interest rate of 2.95%. That is no longer available for issuers nowadays
Hong, GlobalRMB: Why have you not issued any Formosa bonds so far this year?
Wang, FENC: There are many factors to consider. First of all, many markets can now offer access to capital. The Chinese government has lowered the interest rate from 5.35% to 5.10% for a one-year loan; it has also slashed the reserve requirement ratio for banks. For large companies like us, we could borrow an even lower interest rate at 4.6% if we took out loans in China.
However, if we were to issue a Formosa bond here in Taiwan, the interest rate could be higher than 4% for a three year bond. As China continues to lower its interest rate and cut the required reserve ratio for banks, there is no better place for us to raise capital than China if we have an RMB demand for capital in China. Under such circumstances, we would not consider issuing Formosa bonds in Taiwan.
Secondly, Dim Sum bonds are still an option for us. Thirdly, China has set up pilot free trade zones in Shanghai, Guangdong, Tianjin, and Fujian. As China allows offshore RMB borrowing for companies operating in these free trade zones, we would, of course, seek out the lowest cost of offshore RMB borrowing among them. Fourthly, when we export products to Mainland China, we could settle the trades in RMB, thus reducing FX risk. Our central bank also encourages us to settle trades in RMB. That is to say, we do not need to raise additional capital in RMB in Taiwan.
Obviously the Formosa bond market is therefore facing fierce competition. Taiwan authorities need to make extra efforts to overcome those challenges and be sure to provide more opportunities for both issuers and investors in the Formosa bond market.
Hong, GlobalRMB: Both Eddy and David have mentioned that life insurance companies in Taiwan have been huge buyers in the Formosa bond market, and they have also purchased a lot of Dim Sum bonds. I have a question for Yvonne. After the government relaxed the foreign investment limit of 45%, what kind of changes have been seen?
Yvonne Tsai, Cathay Life Insurance: One of the reasons why life insurers in Taiwan were looking for investment opportunities in the overseas market or investments denominated in foreign currency was that Taiwan's interest rate was simply too low. That has been the case for more than two decades. For life insurers to issue insurance policies in the past, they had to bear a cost of capital of more than 4%. However, there is a negative interest rate spread because the current interest rate in Taiwan is only 2%.
Life insurance companies, as a result, have been negotiating with authorities so that they could make more overseas investments. Now the investment cap has been raised to 45%. If we now issue insurance policies denominated in foreign currencies, they are not counted in the 45% limit. Formosa bonds and international bonds are also removed from the 45% overseas investment cap, so the investment cap removal has created a lot of opportunities for Taiwan's bond market.
In the past, we did not have Formosa bonds or international bonds. At that time, RMB was a currency with a high interest rate. In addition to the European and US markets, we also invested in Dim Sum bonds in Hong Kong. After the launch of the Formosa bond market, we entered the market primarily because Formosa bonds and international bonds would not be subject to the 45% limit. RMB-denominated or dollar-denominated bonds in Taiwan have higher yields than those of comparable products denominated in NTD. That trend will not stop unless interest rates increase.
Currently, life insurance companies' investment in foreign currency as a share of their total investment accounts for more than 45%. Life insurance companies, however, are still constrained by the overseas investment cap. Therein lies a risk. We purchase international bonds using foreign currencies, and these bonds are issued as callable bonds. If the issuer suddenly decides to call back these bonds without offering a rollover to existing bondholders, we may need to convert USD or RMB back into NTD so that we do not exceed the cap.
If we fail to do that soon enough, we would not be able to comply with the regulations. Right now, the international bond market continues to grow, and it provides a higher return. The best case scenario would be if the issuers do not call the bonds and therefore there is no need to roll over.
Hong, GlobalRMB: This year the cross-currency swap (CCS) has been driving the growth of Formosa bond issuance. Is this situation going to be unique to this year or is CCS going to continue to impact the market?
Carol Tao, Bank of Taiwan: Yes, this year we have seen a very special situation in Taiwan in terms of CCS. The CCS between USD and RMB has been very volatile. As RMB supply remained tight in China at the beginning of this year, the three year offshore Yuan CCS even rose from 3% to 4.5%. That is why companies who had not thought about RMB bonds in Taiwan decided to issue them around Chinese New Year. At that time, we saw pricing of several different bonds within one day.
But right now the CCS window has gone — that is why the issuance of RMB bonds is coming down as well. Issuers came to Taiwan to issue RMB bonds when the CCS was high due to concerns about capital costs. These borrowers originally needed funding in USD. They issued RMB bonds in Taiwan and then converted the money into USD through CCS because the funding cost was lower this way.
Instead of borrowing in US dollars from the international market, where they would have to pay Libor plus 100bp, they could choose to pay Libor plus 50bp by using the high CCS in Taiwan. The funding cost was greatly reduced. I remember that in Taiwan the cost of issuing a three year RMB bond was as high as 5% earlier this year. Currently, the three year CCS is down to 3% again.
Hong, GlobalRMB: Sarah, what about the second half of this year? Is there going to be another attractive CCS window for another surge of RMB bond issuance? We are also seeing an inversion of the yield curve in CCS pricing. Is that going to influence buyers when they try to assess RMB bonds?
Chen, E.Sun: In the first quarter of this year we saw an increase in RMB CCS due to the depreciation pressure on RMB. It is likely that this will happen again in the second half of this year. In addition, the Shanghai-Hong Kong Stock Connect is also a very important factor. RMB outflows will also push up the CCS. As the exchange rate of RMB is subject to the supply and demand side as well as the technical side of the market, we cannot rule out the possibility that CCS will increase in the second half of this year.
In terms of the inversion of the short-end and long-end of the yield curve, I think that liquidity and expectations of future interest rates provide two perspectives to look at it. Currently the short-end interest and long-end interest rates are quite similar, but we are seeing good liquidity on the short end which has caused liquidity concerns at the long end.
If we try to solve this problem by setting a yield rate of 4.5% for both five year bonds and ten year bonds, which one would investors prefer? They would, of course, choose the shorter bond. This problem is not necessarily caused by liquidity, but market preference.
Hong, GlobalRMB: As Sarah said, if a five year bond has a yield of 4.5% while a ten year bond has a yield of 4.6%, investors would prefer the five year. Right now, the Dim Sum bond market and the Formosa market do not have many long-term bonds. Is the CCS making this situation even more challenging for issuers? Richard, what can regulatory and supervisory authorities do to solve the problem?
Liu, TPex: For RMB bonds in Taiwan, most issuers concentrate on the short end to middle of the yield curve. That is because the demand for long term RMB bonds in Taiwan is still quite small. But if life insurance companies in Taiwan can offer more RMB-denominated insurance policies, the demand for long term Formosa bonds will gradually increase.
We are also now planning to develop a complete yield curve from the short end to the long end for the RMB bond market in Taiwan. On May 25 this year, we will launch a yield curve for RMB bonds in Taiwan. We will first launch the yield curve for bonds rated A and A-.
Around Q3 this year, some Mainland Chinese banks will also come to Taiwan to issue RMB bonds. We will approach these banks and invite them to issue long term bonds so that we can develop the longer end of the bond yield curve. In addition, around September, we will start to compile a Formosa bond index in preparation for the issuance of Formosa bond ETFs. Going forward, we will continue to enhance the infrastructure environment in the market.
Hong, GlobalRMB: This is very good news indeed. Let us come back to Maybank, as an issuer. First, was it the CCS that motivated you to issue a Formosa bond? And second, have you considered issuing longer tenor Formosas?
Lui, Maybank: When we decided to issue a Formosa bond, tenor of course was one of our concerns, but CCS was the most important driver. We needed USD, but Maybank’s credit spread was very small (e.g. Libor plus 60bp-70bp for three years). We wanted to issue a longer tenor bond, but we had to consider investor demand. Most of the Formosa bonds we issued were purchased by banks; lifers demanded longer tenors.
Hong, GlobalRMB: Why didn’t you issue longer-tenor bonds for lifers?
Lui, Maybank: Yes, some of our clients, such as government-linked companies in Malaysia, would like us to issue long-term RMB bonds in Taiwan, of 20 or 30 years. But CCS only has a benchmark yield curve of up to 10 years. For issuers, there may be no hedging tools beyond 10 years, thus creating risks for them. If hedging tools for CCS become more mature, we would definitely issue longer tenor RMB bonds in Taiwan.
Hong, GlobalRMB: Yvonne, what kinds of issuer will attract you if they issue Formosa bonds this year or next year? Richard mentioned that some Mainland Chinese bank headquarters plan to do so later this year. Will that provide a boost to the market?
Tsai, Cathay Life: When investing overseas, life insurers are required to choose companies with certain credit ratings. However, there is no such requirement for the Formosa bond or international bond market. But a life insurer would still face higher charges when calculating its risk based capital if it invests in a company without any credit ratings. So we still favour companies or bonds above investment grade. That would be better for us in terms of investment and capital charge.
Hong, GlobalRMB: The international community is aware that Taiwan is an RMB hub with huge deposits of RMB, but it is less educated on Taiwan’s RMB bond market. They often do not know, for example, whether Formosa bonds are the same as dim sum bonds, or whether it is easy to enter the Formosa bond market.
We have seen very high issuance volume of Formosa bonds this year, but the majority of investors are still Taiwanese. David, have you ever tried to reach out to more international investors when conducting roadshows?
Wang, FENC: Our company is a one of the largest business group in Taiwan with many channels to raise capital. Those Taiwanese investors who invest in Formosa bonds know us well. What’s more, we are a rated company, and that makes it easier for investors to make investment decisions. Reputation and ratings are crucial to bond issuers. If we want to issue RMB bonds, we still prefer to do it in Taiwan.
We have issued ECBs, CBs, and EEBs to international investors, so they know us very well. We go to different markets for various funding needs. For our company, to raise capital directly in USD, we would do it in overseas markets.
Hong, GlobalRMB: Formosa bond rates this year are higher, which can be attractive to international investors. Why is it that 99% of the investors are still local?
Lui, Maybank: From the buyside point of view, I still prefer Formosa bonds to dim sum bonds in terms of yield. The yield of dim sum bonds is not that attractive at the moment. As investors, we hope to maximise our yield returns. That is why I will consider including Formosa bonds in our portfolio.
Hong, GlobalRMB: Richard, do local and international investors face any differences in the investment environment? Do foreign investors have to pay different tax rates or need to prepare different application materials?
Liu, TPex: We have done our analysis on the composition of participants in the Formosa bond and non-Formosa bond market. For the Formosa bond market, insurance companies, securities companies, and banks each take an equal share of around one third of the market. On the other hand, 92% of bonds denominated in other currencies (especially USD) are held by (life) insurance companies.
The trading volume in the secondary market last year was quite substantial, at around NT$600bn. This has to do with the intermediation of underwriters who first got the bonds from issuers and then sold the bonds to real investors.
Currently, there are not many international participants in the Formosa bond or international bond market. That is because most domestic investors adopt the strategy of buy-and-hold, and their demand still remains strong. The majority of buyers are still life insurance companies. Given the current issuing environment, if they focus only on Formosa bonds or international bonds, there will not be much left for other participants in the market.
Hong, GlobalRMB: There will be no bonds left for international investors?
Liu, TPex: International investors need to wait until domestic demand is satisfied. But we are now planning to make it easier for foreign investors to enter the local Formosa bond or international bond market. Traditionally, foreign investors needed to apply to become a QFII (Qualified Foreign Institutional Investor) before investing in the local market. We hope that in the future we can change our regulations; that is, they would not need to apply to be a QFII before they could invest in Taiwan.
Obviously, they will have tax considerations if they invest in Formosa bonds or international bonds offered by local issuers.
Hong, GlobalRMB: Richard mentioned the construction of the new yield curve and the index. Do you think this will stimulate the secondary market and provide more liquidity?
Chen, E.Sun: To drive liquidity, we first need to construct the yield curve. Second, we need to enjoy good name recognition in the market. I am really positive about the construction of the yield curve. USD-denominated bonds have really good liquidity in overseas markets because they have a complete yield curve. It is also important for Formosa bonds to have a complete yield curve covering both shorter-dated and longer-dated bonds.
Also, to increase market liquidity, you need potential participants to know more about your market before they come to Taiwan to issue bonds. That is why promotion is very important. I think Taipei Exchange has done a lot in this regard. We have been working hard in the domestic market to promote the market. In sum, the construction of the yield curve and promotion of the market in Taiwan as a regional investment hub will greatly enhance liquidity.
Tao, Bank of Taiwan: Let me begin by talking about regulations. From last year, the authorities began to adopt liberalisation policies with regard to the Formosa and international bond markets. We believe they will continue to further open up the market. This, and the construction of the yield curve, will further stimulate the growth of the secondary market for Formosa bonds.
Normally lifers or banks adopt the strategy of buy-and-hold when investing in Formosa bonds. One of the reasons is that there is not enough issuance of Formosa bonds, which leads to limited investment targets. That is why currently the liquidity of the market is quite limited. However, after further liberalisation of the market and construction of the yield curve, there will be better price-discovery mechanisms in the secondary market.
Hong, GlobalRMB: People say that lifers all buy and hold. But are you likely to sell more in the secondary market in future? Now lifers in Taiwan can go to China’s Inter-bank Bond Market as direct investors. As rates in that market are higher, will that negatively impact the Formosa bond market in Taiwan?
Tsai, Cathay Life: Let me answer the second question first — basically, no. As previously mentioned, investment in Formosa bonds or international bonds will not be counted as part of our overseas investment. They are totally separate.
Earlier on we were discussing longer dated bonds, and that if they can offer only a 10bp pick-up, will they lose their attraction to investors? People prefer 4.5% for a five-year bond [over 4.6% for a ten year], yes, but that is not necessarily the case for life insurance companies. For life insurance companies, it is important to engage in asset-liability management (ALM) when making investments.
If I issue a 10 year insurance policy at a cost of 4.3%, I would prefer to buy a 10 year bond with a rate of 4.6% rather than a five-year bond with a rate of 4.5%. There is only a 10bp pick-up, but the asset and liability durations cannot match if I have the five year bond. Five years later, while the insurance policy still remains effective, I am not sure if the market can still offer a rate of 4.5%. I would choose to buy the 4.6% bond.
That is why we tend to buy and hold rather than sell the bonds to the secondary market, to match our assets and liabilities. However, we life insurance companies find it difficult to identify good investments to do ALM. So sometimes we engage in short-term trading, where liquidity becomes a very important consideration.
Hong, GlobalRMB: Is maturity mismatch a serious issue for lifers?
Tsai, Cathay Life: A little bit. In previous years, the duration of our insurance policies was quite long, from 10 to 20 years, and we were able to identify investment products with a favourable spread. Nowadays we can go to overseas markets to buy products with a maturity of 20 to 30 years. Still, they cannot cover what we bought before. Therefore, most lifers’ liability duration is still longer than their assets' duration.
Hong, GlobalRMB: We just touched on duration. If the issuance of RMB denominated insurance policies is encouraged in future, there is also a need to have long-term assets denominated in RMB. When AT1 or tier two RMB bonds are issued in overseas markets, Taiwan’s lifers are very important investors, and the issues seen this year have all had long durations. Some lifers have suggested the possibility of listing such structured RMB products in Taiwan…
Liu, TPex: Subordinated bonds issued by domestic issuers are allowed, but foreign issuers cannot issue subordinated bonds in Taiwan. Can we open up the market for more structured products? As Taiwan had some disputes related to structured bonds in the past, we do not have any plan for now to open up the market for the listing of structured bonds in Taiwan.
Hong, GlobalRMB: Let's move on to the broader outlook. Taiwan is the second largest offshore RMB market, the largest being Hong Kong. Will the RMB be included in the IMF’s SDR basket? And if that happens, what kind of impact will we see on Taiwan’s Formosa or international bond market, on investment infrastructure, or bond issuance in general?
Chen, E.Sun: The establishment of an RMB capital pool is crucial to the development of the Formosa bond market. RMB will definitely become a critical part of lifers’ or banks’ reserves. I am very optimistic about the development of the RMB market, and the internationalisation of RMB will greatly benefit the market.
Hong, GlobalRMB: David, you mentioned that some companies choose to issue bonds in China, probably because rates there are going down. We also have free trade zones in Kunshan, Fujian, and Shanghai, where it is easier to access RMB capital. What is your view on this trend?
Wang, FENC: Businessmen are very practical, always looking for places with the lowest funding cost. I am really looking forward to Taiwan’s development into an RMB offshore centre. The cross-Strait trade activities of our company are now settled in RMB rather than USD. Nowadays, the total Taiwan trade reliance on China exceeds 50% directly and indirectly, so I have high expectations of Taiwan’s role as an offshore RMB centre.
Now we have diverse sources of RMB funding. For companies, it is more cost-effective to borrow RMB locally. We can borrow RMB in China at a rate of 4.6%. For BAD (Bank Acceptance Draft) discounting, it is even as low as 3.6%. The rate is going down, and businesses will have more options when it comes to RMB funding in the future.
There are several reasons why international investors do not want to invest in the international bond market in Taiwan. In practice, investors rely heavily on the secondary market to offer liquidity. Unfortunately, our secondary market is inactive. The issuance of dim sum bonds, CBs or ECBs in the overseas market can often induce active trading. In Taiwan, investors always buy and hold, and the investors primarily include cash-rich lifers and banks. That is not a good sign for the secondary market.
We need all stakeholders to work harder to improve the situation. We issuers are very practical; we go to places that we find to be more favourable. The government needs to develop the secondary market and remove all investment hurdles, like tax. However, there is still a long way to go. It is difficult for the market to become open and active at once.
Lui, Maybank: I concur with David. Liquidity is key. Dim sum bonds have a secondary market, and it is easy to trade there. We are different from lifers, who are buy-and-hold investors. Indeed, higher liquidity will boost the market. We have a quota for buying onshore bonds that allows us to buy domestically issued bonds in local markets. The bonds can be traded conveniently. If the secondary market can enjoy better liquidity, that will be a boon to the development of Formosa bonds.
Hong, GlobalRMB: We have touched on some of the challenges facing the secondary market of Formosa bonds, and we have compared Formosa bonds with dim sum bonds. But still we have the question of why there are so few international investors. For the Formosa bond market to take off, have you considered connecting with the markets in Singapore, Malaysia, or London?
Liu, TPex: In Taiwan, many Formosa bonds are dual- or triple-listed in different markets. We are now planning to work with other exchanges around the world: issuers would only have to disclose information to one of the stock exchanges, and then the bonds could be traded in two or three stock exchanges. We are working with our peers to lower the issuing cost for bond issuers. Issuers can then decide which stock exchange is more cost effective for them to issue bonds. I believe that with international co-operation, we can attract more issuers to Taiwan.
Regarding RMB bring included in the IMF's SDR currency basket, once that happens I expect RMB will soon become one of the world's reserve currencies, and that will lead to a huge increase of demand for RMB-denominated bonds worldwide.
That is an opportunity for us. Taiwan has a trade surplus with China. If we can increase the amount of trade settled in RMB, I believe that we can expand the RMB funding pool in Taiwan. With that, the demand for RMB-denominated bonds in Taiwan will increase as well.
Now Formosa bonds are issued or traded on a specific or designated board. But if they could be traded on the exchange in general, not just limited to a specific board, it would lead to a more active secondary market.
We are also designing the infrastructure for launching a bond fund and Formosa bond ETF. Also we would like to encourage underwriters to provide quotes in the first three months after a bond is issued, but we do not know whether that is doable or not because most of the buyers of Formosa bonds in Taiwan buy and hold, and that leaves fewer opportunities for others.
If we look at the history of the NTD-denominated bond market, at the beginning we only had a primary market. It took us a while to develop an active secondary market. So I believe that we will follow the same path, with more issuers coming to Taiwan.
At the same time, because of the demand for Formosa bonds in the spot market, we are also seeing some hedging demand. We hope that in the future we can allow China CDS to be traded in Taiwan. By doing so, we can transfer some of the credit risks to different market participants.
Tao, Bank of Taiwan: Regulators have been trying to relax the rules and regulations in order to attract more issuers to come to Taiwan to issue Formosa bonds. But some potential issuers said to us that they are not willing to issue long-term bonds. For those foreign issuers, their funding need lasts only for two or three years, but no more than five years.
If they raise money by issuing long-term Formosa bonds, the funding cannot be used in Mainland China unless they get approval first. It takes a very long time for those foreign issuers to get approval from regulators in China to use the overseas RMB funding there. That is why they mainly issue short-term Formosa bonds of no more than five years in Taiwan.
However, in the second half of this year, one of the major Chinese banks’ headquarters will issue RMB bonds in Taiwan, and those will be longer-term bonds, perhaps even over ten years. I am wondering whether there will be more opening-up policies in China after that. It will be a great incentive for lifers because lifers demand absolute return on investment for any investment target. The demand for seven year bonds was mostly from lifers. The demand for three year and five year bonds was mostly from banks.
The amount of RMB deposits in Taiwan has been rising. In order to digest these, we need to encourage the development of RMB-denominated investment tools, be it RMB bonds, Dim Sum bonds, or some other assets.
Chen, E.Sun: So far most of the Formosa bonds issued have been dated less than five years; this has to do with the distribution of the yield curve and the demand for capital. If we are to see an increase in longer dated Formosa bonds, the four major [Chinese] banks are crucial. In the second half of this year, a joint stock bank is coming to Taiwan to issue Formosa bonds. Those will be longer dated because the capital can flow back.
Coming back to the secondary market, we know that Formosa bonds were launched later than Dim Sum bonds, so we need to make sure that international investors have a better understanding about Formosa bonds. Dual-listing, as mentioned by Taipei Exchange, is one way. We have several dual-listing cases, including between Taipei and London, and between Taipei and Hong Kong.
Dual-listing provides a very good opportunity for issuers to be diversified, and this will enhance Taiwan's visibility. More and more people will know about the existence of the market in Taiwan. This will help drive the liquidity of the local market in Taiwan.
Tao, Bank of Taiwan: We also hope to see more trading activity in the secondary market because Bank of Taiwan has a huge position of Formosa bonds.
As far as we know, a lot of foreign investors are very interested in investing in Formosa bonds, but tax issues are a major concern. If we cannot provide sufficient tax incentives, we will not be able to attract more international investors because they are looking for absolute return. They will definitely ask about how much tax they need to pay.
When a Formosa bond is issued by a Mainland Chinese bank’s Taipei Branch, according to our regulations it is considered to be from a local issuer. So for international investors to invest in Formosa bonds issued by this bank, they need to pay more tax. This is what these investors would consider seriously. That is the first question.
Also, non-bank companies currently are not allowed to issue Formosa bonds in Taiwan. However, if the four major banks of Mainland China can provide guarantees for these companies, will our regulators consider allowing them to issue? I am thinking about major companies, such as state-owned companies.
Hong, GlobalRMB: Internationally, most issuers in the Dim Sum bond market are still Mainland China companies, and a lot of Taiwanese investors are investing heavily in those bonds, so the exposure to that credit risk is the same…
Wang, FENC: If we increase the number of issuers of Formosa bonds, for instance, with companies endorsed by major banks from China, this will push up the interest rate and crowd out domestic issuers. Right now the interest rate in Taiwan is very low. That is why it is quite attractive to international issuers. Even banks like to come to Taiwan to issue bonds and take the money back with them. There are pros and cons. If we want to internationalise our market, then yes, we need to invite companies with good credit or with guarantee from China to issue Formosa bonds in Taiwan. It will help drive cross-strait trading, but it will definitely crowd out local issuers.
Tsai, Cathay Life: The pool of RMB in Taiwan is getting bigger and bigger, which serves as a good foundation. In addition to tax considerations, issuer diversification is also a very important consideration. They issue Formosa bonds in Taiwan or Dim Sum bonds in Hong Kong because they have the demand for using RMB as a funding currency.
In fact, most enterprises with RMB demand are Chinese enterprises, so I think that we can open up our market even further, not just to financial institutions.
In addition, I completely agree with Mr Liu. Securities companies need to serve as a market maker in the secondary market. If they do not hold a position or give a quote, it will be very difficult for buyers or issuers to do their job. We need to make it possible for securities companies to serve as market makers.
Hong, GlobalRMB: I would like to invite each panellist to give some concluding remarks. What are your views on the development of the markets for Formosa bonds and international bonds in the second half of this year, and in the next five years? Let's start with Yvonne.
Tsai, Cathay Life: We obviously hope that Formosa bonds can become more and more visible. Internationally, there are already a lot of markets that are mature in terms of bond issuance in US dollars. We have a niche in Formosa bonds. Sometimes in Mainland China liquidity tends to be tighter. Taiwan can complement Mainland China by developing our Formosa bond market so that companies will find it easier to raise capital in RMB.
Wang, FENC: The world is in a constant state of flux and we need to adapt ourselves to the constantly changing market. Mainland China is implementing the "One Belt, One Road" policy. China is without doubt rising. By 2025, China will become the largest economy in the world in terms of GDP. As a neighbour of Mainland China, we can probably benefit from the opportunity to stand upon the shoulder of this giant next door so that we can further develop our economy.
Investors, issuers, government agencies and underwriters — these four market players need to work together so that we can further liberalise the market. With the concerted efforts of these four players, I believe that Formosa bonds and international bonds will have a very bright future in Taiwan indeed.
Hong, GlobalRMB: You have both mentioned that Taiwan enjoys a lot of advantages by serving as an offshore RMB centre. The reason why there has been a lot of issuance of Formosa bonds this year is because many issuers from different countries came to Taiwan to issue bonds, from the newly-established offshore RMB centres in France, Germany, the Middle East, Japan, the UK and Malaysia. They could have issued bonds in their respective countries, but they chose to issue Formosa bonds in Taiwan because they believe that it offers benefits.
Lui, Maybank: I hope that Maybank can represent ASEAN and help lead the way by working with major state-owned companies in Malaysia to issue more Formosa bonds. The previous speakers have already touched upon what I would like to say, so I only have this to add. On behalf of Maybank, I hope that we can bring more GLCs to issue Formosa bonds in Taiwan.
Chen, E.Sun: From buyside to sellside, as underwriters and investors, we can see that the market is booming. The capital pool is expanding, and Taiwan has already become more visible on the international stage. In the second half of this year, I believe that there will be more opportunities because the regulators have come up with more friendly policies.
We all have some suggestions for our regulators. As Mr Liu mentioned earlier, the authorities are gradually deregulating, so in the second half of this year, the market of Formosa bonds should have a bullish prospect.
Liu, TPex: With regard to the future prospect of Formosa bonds, from the perspective of regulators, we want to see more success. This is obviously what we hope for from the bottom of our heart. We also hope that we can diversify our issuers. For example, state-owned companies of Mainland China will be allowed to issue Formosa bonds.
We want to adopt a gradual approach. In the first stage, we will allow state-owned banks, joint-stock banks, and policy banks to issue Formosa bonds in Taiwan. In the second stage, we should consider what type of companies from China should be allowed to do the same. We are already negotiating and communicating with other relevant government agencies.
Where should we draw the line? We know that corporations in China face a very different regulatory system from us. Although state-owned companies tend to have a better rating, we still need to consider what type of state-owned companies should be allowed to come to Taiwan first.
We know that if we open our market to state-owned companies in China, in addition to the potential benefits, there are also adverse effects that we need to take into account. We need to make sure that the direction we are heading in will not adversely affect the development of the Formosa bond market.
On the demand side, in terms of the accumulation of RMB in Taiwan, we have seen that the RMB pool in Taiwan has been expanding rapidly. If RMB becomes one of the SDR currencies of the IMF, then RMB will continue to grow. However, if RMB becomes an extremely volatile currency, this will probably dissuade a lot of potential investors.
If more trades between the two sides of the Taiwan Strait can be settled in RMB, or if all transactions between the two sides will be settled in RMB in the future, then the RMB pool in Taiwan will continue to enjoy exponential growth.
In order to promote the Formosa bond market, both the supply and demand side must work together. When we open up our market, we have to factor in different opinions from different parties. It is just a matter of time before the policy is implemented.
Tao, Bank of Taiwan: It takes time for a market to grow. Before we started the Formosa bond market, we already had the international bond market in Taiwan. The market was very small, and most of the investors were retail investors. Now, in the Formosa market, we are seeing an increasing participation by banks and financial institutions as the banking industry accumulates huge capital.
Most issuers of Formosa bonds and international bonds are introduced by overseas banks and investment banks, and they have also attracted some foreign investors to Taiwan. Today our regulators have been conducting roadshows worldwide to attract foreign issuers to come to Taiwan to issue international bonds or Formosa bonds. I believe that (Taiwan) financial institutions such as banks can also take advantage of overseas branches or other channels to invite foreign issuers to come to Taiwan, instead of just relying on overseas foreign banks.
Many factors can contribute to the success of the market, such as the efforts by securities companies and banks, further deregulation by regulators and the internationalisation of the RMB. All these will benefit the development of the Formosa bond and international bond market.