The falling cost of swapping offshore renminbi, or CNH, bonds into other currencies has prompted foreign issuers to seek funding in the still-nascent market since the beginning of the year.
China’s recent easing of monetary policy, relaxation in rules governing cross-border currency flows and lack of Chinese borrowers issuance in the offshore market have caused cross-currency swap rates between the dollar and CNH to hit an all-time high in recent weeks.
These factors have made it more attractive for overseas borrowers looking to broaden their funding options into the so-called dim sum bond market as they are able to save approximately 39 basis points to 49bp when converted back into US dollars, bond experts estimate.
Caisse d’Amortissement de la Dette Sociale (Cades), which manages the French public social debt, and the Seoul-based Export-Import Bank of Korea (Kexim) were able to benefit from these cost savings, reinforcing the renminbi’s growing role as a funding currency.
HSBC said in a February 4 report that it expects an increase in the amount of CNH bonds issued by foreign issuers, namely multinationals or supranationals, simply because it is now more economical.
“With the [cross-currency swap] being quite high recently, it’s quite attractive for issuers to raise funding in the renminbi because after swapping back to the home currency, the hedging cost would be quite comparable to what they’re used to raising in their home market,” Gregory Suen, investment director for fixed-income at HSBC Global Asset Management, said at FinanceAsia’s sixth annual Borrowers and Investors’ Forum on February 5. He said that these borrowers are motivated to raise renminbi to diversify their investor base.
A cross currency swap, a financial instrument that allows participants to exchange both principal and interest payments denominated in two different currencies, is a favourite tool of foreign bond issuers seeking cheaper funding globally. The higher the dollar-offshore renminbi, or USD-CNH, cross-currency swap rate, the better, as it can translate into higher cost savings for borrowers.
The three-year USD-CNH cross-currency swap rate has climbed steeply, touching an all-time high of 4.18% on February 16. The number has then trended down slightly to 4.05% on February 24, above the 2.93% level seen end-2014, according to Bloomberg data.
Most recently, on February 10, Kexim sold a Rmb1 billion ($160 million) three-year fixed-rate offshore renminbi bond at an all-in yield of 4.4%.
On the surface, that looked like a fairly expensive deal for the South Korean issuer but the elevated cross-currency swap rate — at the time, 3.86% — allowed it to come inside the dollar curve by 10bp, according to a source close to the deal.
Cades, meanwhile, priced a Rmb3 billion ($480 million) two-year offshore-renminbi bond at a fixed-rate coupon of 3.8% on January 28.
“We paid only 2bp in new issue premium, which corresponds to what we are used to paying for entering the dollar or euro market,” Philippe Noel, head of capital markets at Cades, told FinanceAsia. “We might look at further [CNH] deals this year on an opportunistic basis.”
To be sure, the benefit of a cheaper swapping mechanism is only true for issuers that are looking to convert the renminbi back into the US dollar or euro.
Liquidity trickles out
The recent change in the dynamics of the USD-CNH cross-currency swap rate is due to a liquidity crunch in the offshore renminbi market as well as declining CNH liability hedging flows due to lower volumes of dim sum bond issuance year-to-date, fixed income experts explained.
The launch of the Hong Kong-Shanghai Stock Connect scheme in November — which allows Rmb23.5 billion of daily cross-border transactions — has kept offshore liquidity conditions tight as flows have been skewed northbound. A total of nearly Rmb70 billion from Hong Kong’s Rmb1 trillion deposit pool has been repatriated back to the Mainland through this channel since November, HSBC said.
“The [CNH] market has been tentative with liquidity very tight and [the swap] market fairly volatile,” Ken Wei Wong, head of syndicate at Barclays. “This is a market where one would have to watch the bond markets carefully to make sure we have sufficient investor demand, and at the same time ensure that the swap market is also at the right place so that we can execute transactions.”
Also, the jump in cross-currency swap rates was largely due to a lack of CNH bond issuance, which would have brought in a large amount of hedging flows and pressed down the curve.
Chinese issuers have stayed away from the offshore market for the most part, partly due to expectations of lower domestic funding costs post the rate cut by the People’s Bank of China first time in November since July 2012. The one-year lending rate was reduced by 0.4 percentage points to 5.6%.
As a result, funding costs in Hong Kong’s renminbi market — which historically has been lower than the onshore market — climbed to 3.7% versus 3.2% on the Mainland, analysts said, based on the one-year forwards implied rate for the currency against the dollar.
Year-to-date dim sum bond issuance —which has risen steadily over the past eight years to reach Rmb564 billion in 2014 — has fallen to $1.45 billion from $4 billion during the same period last year, according to Dealogic.
For the year, volumes are expected to decline to Rmb480 billion to Rmb500 billion, according to Standard Chartered. HSBC, the biggest dim sum bond underwriter, expects a drop of up to 8%.
That said, the severity of the decline — which primarily comes from Chinese corporates — will be substituted by the rise in foreign issuance that will continue to capture the arbitrage opportunity.
“On the sovereign side, we think some sovereign and sub-sovereign issuers will make their debut issuance to boost the market position of the offshore renminbi trading centers in their home countries,” Ivan Chung, head of Greater China credit research at Moody’s, said.
