RMB Bond Issue in Hong Kong (a.k.a. A Delicious Dim Sum Offering!) – Challenges to Hong Kong – Part 5

by Dorsey & Whitney LLP
Contact

Foreign and Chinese companies seeking to access the renminbi (“RMB”) bond market can now raise capital without time-consuming IPOs, rights issuances and secondary offerings. It also provides a cheaper form of RMB financing to an issuer than raising capital onshore1. An RMB bond provides investors (who otherwise have very few options to invest in offshore RMB) with RMB exposure. The Hong Kong RMB bond market, also known as the Dim Sum bond market, is the first offshore2 market for investments in the Chinese currency, but it has seen slow growth in the past few years. This eUpdate is part 5 in a series of eUpdates on this topic. Part 1 deals with laws and regulations applicable to, and features of, an RMB bond. Part 2 discusses points that an RMB bond issuer should consider. Part 3 deals with the documentation and issue process of an RMB bond. Part 4 considers some structural issues that the Dim Sum bond market continues to face after its liberalization in 2010. Part 5 considers the competition and challenges posed by other offshore RMB markets to Hong Kong as the major offshore RMB business center.

Hong Kong as the major offshore RMB business center

Since 20103, Mainland China4 began a series of deregulation which served to boost the use of its currency overseas5; the Chinese government then extended the class of Dim Sum bond issuers to include multinational companies and international financial institutions6. In 2011, China’s 12th Five-Year Plan promulgated the policy of promoting wider use of RMB in cross-border transactions and supporting Hong Kong’s development as an offshore RMB business center7. As of August 31, 2013, 39% of RMB-denominated bonds were listed on the Hong Kong Stock Exchange (“HKEX”)8, indeed the leading offshore RMB business center. On November 1, 2013, the Canadian province of British Columbia raised RMB 2.5 billion – the first government other than China to tap the offshore RMB market9. Until then, it has been mostly corporations operating in Mainland China, such as BP, which were interested in financing their RMB investments, even only in part, through the Hong Kong Dim Sum bond issues10.

Rise of other offshore centers

As a result of the RMB’s internationalization, overseas markets began to emerge.

Singapore

In Asia, Singapore emerged as an offshore hub for the RMB. Singapore Exchange (“SGX”) was the first in the world to offer clearing of over-the-counter foreign exchange forwards for RMB11. SGX launched depository services for RMB bonds on May 27, 2013, supporting Singapore’s development as an offshore RMB hub12. Around the same time, Standard Chartered PLC successfully raised RMB 1 billion through a Dim Sum bond listed on the SGX13. It was the first Dim Sum bond which was listed, cleared and settled in Singapore, and the order book was over three times subscribed with significant demand from some of the largest institutional investors in the region14. On November 29, 2013, the SGX welcomed the first RMB bond to be listed and cleared in Singapore by a Chinese bank (the Singaporean branch of Industrial and Commercial Bank of China (“ICBC”)). The bond issue was for RMB 2 billion on a two-year tenor. According to the book runners, Singapore investors took up 55% of the bond issue15.

Luxembourg

The Luxembourg Stock Exchange (“LuxSE”) is the dominant European offshore financial center for RMB. The country enjoyed a longstanding relationship with Mainland China, including strong economic ties16. The LuxSE signed a Memorandum of Understanding with the HKEX in 2001 and another with the Shanghai Stock Exchange in 200617. It became the first European exchange to list a Dim Sum bond in 201118. Two of the largest Chinese banks, ICBC and Bank of China (“BOC”), have their European headquarters in Luxembourg19. China Construction Bank (“CCB”) also chose Luxembourg as its European base and opened a subsidiary20 in October 201321. CCB’s spokesperson said that “the CCB was attracted by Luxembourg’s good location, its good financial environment, the effective government, the prudent supervision and an open attitude towards the Chinese banking sector22." He noted that “the speed with which the CCB acquired authorization from the Luxembourg Government was the fastest since the beginning of the internationalization of CCB businesses23." On January 14, 2014, the Canadian province of British Columbia (further to its recent Dim Sum bond issue in Hong Kong) raised RMB 2.5 billion on the LuxSE24. As of January 20, 2014, there were 41 Dim Sum bonds listings in LuxSE from 29 international issuers25.

London

Albeit a newcomer to the RMB party since merely two years ago26, and despite its relatively small share of the Dim Sum bond market at present, London is catching up. Spot RMB foreign exchange volumes almost doubled in the first half of 2013 over the same period in 2012, hitting a daily value of US$4.8 billion27. Total trade finance denominated in RMB amounted to RMB 27.9 billion in the first half of 2013: more than double the amount over the same period in the previous year28. The rate of growth shows increasing desire for global companies to adopt RMB in international trade29.

In October 2013, Beijing gave investors based in Britain the right to buy up to RMB 80 billion of stocks, bonds and money market instruments in Mainland China, putting London ahead in the race to become the main offshore hub, alongside Hong Kong, for trading in Mainland China’s currency and bonds30. George Osborne, Chancellor of the Exchequer announced in October 2013 measures intended to strengthen financial ties between the UK and Mainland China31. The two countries agreed to allow direct RMB-GBP trading in Shanghai and offshore, making the pound the fourth currency to trade directly against the RMB32, while Chinese banks would be accorded special treatment to draw them to London33. Prior to this, Chinese banks were put off by a regulatory drive towards subsidiary structures with their own capital and funding requirements in London. Luxembourg was the preferred base for these banks34.

ICBC issued a RMB 2 billion bond in London (the “ICBC London Bond”) in November 201335. This, according to George Osborne, would be the first mainland-headquartered Chinese bank to sell Dim Sum bonds in London36.The bond was comprised of two tranches: a three-year portion and a five-year portion37. In January 2014, the London branch of BOC raised RMB 2.5 billion38. The bond (the “BOC London Bond”) was the first issue from the London branch of a Chinese bank to the Dim Sum bond market39. It was the fourth Dim Sum bond to be issued in London. European investors took up 40% of the deal, the largest proportion from the region in offshore RMB issues so far40. It reflected increasing confidence and comfort with which Europeans are now dealing with offshore RMB issues. It was described as “a landmark bond issue, underscoring the city’s potential as a hub of yuan fundraising for European debt issuers and posing a threat to Hong Kong41." Indeed, many Western bond issuers, especially European ones, may prefer London for its time-zone advantage, strong regulatory framework and global foreign exchange volumes42. Moreover, as the world’s biggest center for foreign exchange trading43, there is a high concentration of banks in London44.

Challenges to Hong Kong

According to data from Bloomberg as of August 31, 2013, 39% of RMB-denominated bonds were listed on HKEX, 29% on SGX, 21% on LuxSE, 4% on London Stock Exchange and 7% on other exchanges45. These figures clearly did not take the recent deals into account, including the few that we have mentioned above, but gave a rough picture of the distribution of the “pie” (or dim sum!) of the four largest offshore RMB centers around the globe. Following Mainland China’s policy to internationalize and “open up” the RMB, thereby enabling it to be used as widely as possible, Hong Kong is in the danger of seeing its market share in the Dim Sum bond market fall from the current height46.

Take Singapore as an example. In addition to its sound financial infrastructure and economic ties, Singapore has been increasingly keen on drawing on its deep and liquid capital markets as it cements itself as a regional hub for RMB financing needs47.

Some may argue that it would be difficult for European exchanges to “snatch” deals from Hong Kong, as the bulk of subscribers of RMB debts are still based in Asia48. In 2013, over 70% of Dim Sum bond issuers are from Mainland China and Hong Kong49. However, Asian investors do not have a problem with tapping into other markets for Dim Sum bonds: the majority of the ICBC London Bond – 70% of the three-year bond and 65% for a five-year issue – was sold in Asia50; Asian investors took up 60% of the BOC London Bond51; etc. BOC said that it was planning more issues52. A senior capital financing officer at the HSBC envisaged that Dim Sum bonds in London would grow into a similar size per deal as the RMB three to four billion transactions being executed in Asia53.

However, “London has two challenges in developing its offshore RMB business. One is that the city doesn’t have a local clearing bank, though talks on this have started. Also, it will take time to educate local investors. If you talk to EU investors about RMB products, you’ll see that some are still not that familiar with this asset class54.” For Luxembourg, there is no quota for Chinese investment55 similar to the RMB 80 billion quota granted to the United Kingdom last year.

The head of RMB trading settlement at a European bank said that the internationalization of the RMB beyond Hong Kong was designed not to have cities competing but to ensure companies were comfortable trading in RMB56. Hong Kong itself may also benefit from the rise of financial rivals57. “The pie gets bigger, and that would open tremendous interest for the Chinese currency… Every city, whether it is London or Luxembourg, has its unique strengths, and that will promote the internationalization of the currency58.” That may be easier said than done: to maintain its leading position, Hong Kong will need to introduce more measures to make sure that its strengths remain unique.

1   “Onshore” in this article refers to the jurisdiction of the PRC.
2   “Offshore” in this article refers to the other jurisdiction areas of the PRC, in particular, Hong Kong.
3   For more information on PRC Regulations (especially those prior to 2010), see RMB Bond Issue in Hong Kong (a.k.a. A Delicious Dim Sum Offering!) - Part 1 (http://www.dorsey.com/eu_hk_rmb_bond_issue_pt1), May 9, 2013.
4   “Mainland China” in this article refers to the geopolitical area under the jurisdiction of the PRC, excluding Hong Kong, Macau and Taiwan.
“PRC” in this article refers to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan.
5   “Easing of rules on dim sum bonds urged”, Bloomberg, December 13, 2013.
6   See RMB Bond Issue in Hong Kong (a.k.a. A Delicious Dim Sum Offering!) - Part 1, ibid.
7   http://www.hkma.gov.hk/eng/key-information/insight/20130221.shtml
8   According to data from Bloomberg. See “Listing Dim Sum bonds in Luxembourg”, Luxembourg Stock Exchange, November 2013.
9   “Dim Sum Busiest in 17 Months as BlackRock Bullish: China Credit” by Fion Li, Bloomberg, December 3, 2013.
10  “Hong Kong ‘Dim Sum’ Bond Market Becoming Market of Choice” by Hans Parisis, Moneynews, November 5, 2013.
11  News & Updates, Singapore Exchange, May 27, 2013. (http://www.sgx.com/wps/wcm/connect/sgx_en/home/higlights/news_releases/sgx+launches+depository+services+for
+rmb+bonds
)
12  Ibid.
13  https://www.sc.com/en/news-and-media/news/asia/2013.05.28-sc-singapore-CNY-bond-successfully-closed.html
14  Ibid.
15  News Release, Singapore Exchange, November 29, 2013. (http://www.sgx.com/wps/wcm/connect/sgx_en/home/higlights/news_releases/SGX+welcomes+first+Chinese+Banks
+RMB+bond+listed+and+cleared+in+Singapore
)
16  “Listing Dim Sum bonds in Luxembourg”, Luxembourg Stock Exchange, November 2013.
17  See http://www.rmb-business.com/rmb-in-luxembourg/dim-sum-bonds.
18  See footnote 16.
19  “Luxembourg, the main international RMB centre in the Eurozone”, Luxembourg for Finance, June 18, 2013.
20  “London to dominate Rmb? Not so fast, says Luxembourg” by Simon Rabinovitch and James Fontanella-Khan, Financial Times, October 31, 2013.
21  “Opening of China Construction Bank’s European headquarters spurs Luxembourg’s yuan hub hopes”, Reuters in Luxembourg, October 30, 2013.
22  See http://www.luxembourgforbusiness.lu/en/news-benchmarks/china-construction-bank-opens-branch-office-luxembourg, November 4, 2013.
23  Ibid.
24  “Securities denominated in CNY listed on the Luxembourg Stock Exchange (as of 20/1/2014)”, Luxembourg Stock Exchange.
25  See footnote 17.
26  HSBC was the first to issue RMB bonds in London in April 2012 (see http://www.hsbc.com/news-and-insight/2013/fast-facts-offshore-rmb-market). On November 29, 2012, CCB announced the successful issuance of its first offshore Dim Sum bonds in London; CCB, therefore, is the first Chinese financial institution to launch Dim Sum bonds in London and list Dim Sum bonds on the London Stock Exchange (See www.uk.ccb.com/london/en/ggxx/201311251385343383.html).
27  According to the City of London Corporation.
28  “CNH Tracker – Trade, not deposits, may be London’s calling” by Michelle Chen, Reuters, January 23, 2014.
29  Ibid.
30  See footnote 21.
31  “London wins first offshore renminbi issue” by Christopher Thompson, Financial Times, November 12, 2013.
32  See footnote 31.
33  See footnote 20.
34  See footnote 31.
35  See footnote 31.
36  “ICBC Dishes out ‘London’ Dim Sum Bonds to Asia” by Ben Edwards, Wall Street Journal, November 14, 2013.
37  See footnote 31.
38  “Dim Sum market makes healthy start to 2014” by Jing Song, FinanceAsia, January 10, 2014.
39  See footnote 31.
40  See footnote 38.
41  “London challenges Hong Kong with BOC’s yuan bond” by Jeanny Yu, SCMP, January 9, 2014.
42  See footnote 41.
43  See footnote 20.
44  See footnote 31.
45  See footnote 16.
46  See footnote 41.
47  See footnote 41.
48  See footnote 41.
49  See presentation by Frances Cheung of Crédit Agricole Corporate & Investment Bank on Offshore RMB.
50  See footnote 36.
51  See footnote 38.
52  According to Yan Wang, assistant general manager at Bank of China London. See footnote 53.
53  “Record dim sum bond issue for London” by Christopher Thompson, Financial Times, January 10, 2014.
54  According to Crystal Zhao, a Hong Kong-based fixed-income analyst at the HSBC. See footnote 41.
55  See footnote 21.
56  See footnote 21.
57  According to Andrew Main, managing partner at London-based fund management firm Stratton Street Capital. See footnote 21.
58  According to Andrew Main, managing partner at London-based fund management firm Stratton Street Capital. See footnote 21.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!