Politicians and central bankers throughout the world daily opine or whine about the uncompetitive value of China’s currency. But, barely a month goes by without an initiative in the offshore renminbi markets that portends its increasing role as an international means of exchange.
Yesterday, the Asian Development Bank (ADB) priced its first global bond denominated in renminbi. The issue, launched in Hong Kong, carries a 10-year bullet maturity and might well provide a critical long-term pricing reference for other borrowers.
“This bond will act as a useful benchmark for other potential borrowers, helping to develop the offshore renminbi bond market into an important source of funding for borrowers as well as an investment destination,” said Bindu Lohani, ADB's vice president for finance and administration, in a statement.
The ADB issue is the first offshore renminbi bond from a triple-A rated entity and the first by a supranational borrower.
“There are three main purposes for the issue, its size and its structure: it establishes a benchmark for other borrowers to price deals; it provides access for international investors to a currency which is rapidly gaining global importance; and the long duration matches ADB’s liabilities,” Daniel Mamadou, co-head of corporate coverage and debt capital markets for Asia at Deutsche Bank told FinanceAsia.
The bonds received strong demand through a book building process and marketing that lasted less than two weeks. Initial guidance was for a Rmb1 billion ($150 million) issue with a coupon ranging from 2.85% to 2.9%. In such an immature market, determining the appropriate price was more an art than a science; more Monet than Einstein.
In the end, the Regulation-S issue was two to three times subscribed and the deal size was increased to Rmb1.2 billion. The coupon was fixed at 2.85% and the bonds were re-offered at par for a 2.85% yield as well. The bonds mature on October 21, 2020 and there is no early redemption clause.
The joint lead managers, Deutsche Bank and Bank of China (Hong Kong), distributed 62% of the issue in Asia and 38% in Europe. Fund managers bought 56% of the bonds, commercial and central banks took 41% and the remaining 3% was sold to retail investors via private banks. Investors included offshore US accounts, according to bankers familiar with the transaction.
Yet, at first sight it was curious that demand wasn’t stronger when expectations are high among investors and analysts that the renminbi must appreciate. The reason, apparently, is that it takes time to set up renminbi accounts.
“The marketing period was quite short, so only investors who had already set up renminbi accounts could participate in the deal,” explained a source familiar with the transaction.
The bonds were trading at par in the grey market yesterday, but liquidity is likely to be weak because few holders will be tempted to sell unless alternative renminbi assets with comparable yields and durations are made available soon.
Nevertheless, “the significance of this transaction should not be understated. By launching a 10-year bond, ADB has made an important contribution to what is the essence of any market -- the creation of a transparent and liquid pricing benchmark," said Mamadou at a press conference yesterday morning.
“Such a step is critical in giving borrowers and investors a reference from which to assess the price of future bond issuance; it also strengthens Hong Kong's renmimbi bond market which is still very young,” he added.
Sales of renminbi-denominated bonds in Hong Kong were first sanctioned by the People’s Republic of China (PRC) in 2007. Since then, there have been about 30 issues of bonds and Certificates of Deposit (CDs) worth around Rmb49 billion, but most have had tenors of two or three years, and none have been longer than five years.
In August, McDonalds became the first multinational non-financial borrower to issue a renminbi-denominated bond in Hong Kong. It was a landmark transaction by a company with an iconic US brand, but the size was small (Rmb200 million) and the tenor short (three years).
So, boasts about the significance of ADB’s deal are perhaps justifiable.
“[ADB] has made an important breakthrough as the tenor of this bond issuance is 10 years. Such long-dated bonds not only help meet the varying needs of investors by offering them more choices, but also have a far-reaching impact on the yield curve,” said David Wong, deputy chief executive of Bank of China (Hong Kong), in a written statement.
Mamadou also highlighted the role of the Hong Kong Monetary Authority (HKMA) in developing an offshore renminbi centre.
Daily trading volumes in US dollar/offshore renminbi in Hong Kong have now reached $150 million, up from only $2 million to $3 million in July. Deutsche Bank also sees strong corporate demand for trade-related renminbi services and receives significant interest from borrowers looking to use Hong Kong as a key source of renminbi funding.
“There has been a considerable build-out of a domestic renminbi deposit base, beginning in 2003 [now worth about Rmb100 billion], the subsequent opening of a deliverable foreign exchange market and trade-related banking products. All these actions have created a solid foundation from which the offshore renminbi bond market can now grow,” said Mamadou.
“We are confident that all the necessary conditions are present to ensure Hong Kong's offshore renminbi bond market will emerge as one of Asia's key local currency bond markets,” he added.
Settlement and clearing of the bonds in the primary and secondary markets will be through the HKMA's Central Moneymarkets Unit, which is linked to the international clearing agents, Euroclear and Clearnet.
ADB has applied to list the bonds on the Hong Kong stock exchange, and if approved they will be the first renminbi bonds to be traded and settled on the exchange.
Previously, ADB has sold two other renminbi-denominated bonds, both in the onshore PRC market. It launched its debut Rmb1 billion issue in October 2005 and second Rmb1 billion issue in December 2009.
According to a statement, ADB will use most of the proceeds from this new issue to finance projects in mainland China, especially in clean energy such as wind power, water treatment and infrastructure.