China’s top lenders are awaiting approval to issue a swath of dim sum bonds after the summer break and are close to formalising mandates, according to banking sources. The flood of issuance — likely to be issued through the mainland entities of Chinese banks — is expected after the Ministry of Finance auctions its dim sum bonds in August.
Agricultural Bank of China (ABC) is said to be close to formally announcing a mandate. At least two foreign banks — HSBC and Standard Chartered — are close to the deal, while a few Chinese banks are also expected to play a role.
According to a banking source, the target is to launch the deal in mid to late August. ABC is contemplating offering bonds to institutional as well as retail investors. The bank could launch a first tranche of about Rmb3 billion to Rmb4 billion ($466 million to $621 million), followed by subsequent tranches later in the third and fourth quarter.
Other Chinese lenders, including Bank of Communications, China Construction Bank, Bank of China and ICBC are also said to be seeking approvals to each raise roughly Rmb10 billion to Rmb15 billion ($1.6 billion to $2.3 billion), but that total amount is expected to be staggered over time. Bank of Communications and China Construction Bank are both rumoured to have shortlisted banks.
The two policy banks — China Development Bank and Export-Import Bank of China — are also considering dim sum bonds, but it is not clear how much they plan to raise.
Bankers caution that a flood of issuance might hurt the dim sum market. “The banks are all lobbying the authorities to be the first to issue,” said one banker. “Everyone wants to come out first given the huge supply of bonds in the pipeline, but it won’t make sense for them to flood the market in one week.”
Anticipation of further Chinese bank fundraising in the dim sum bond market has already sent yields up. According to Becky Liu, a fixed-income strategist at HSBC, the yield on China Construction Bank’s one-year certificate of deposit has already risen from 0.5% in May to 1.3% to 1.35% presently as the market anticipates further supply from Chinese banks.
So far this year, China’s banks have mostly issued certificates of deposit (CD) through their offshore entities, with issuance peaking in May. CDs trade in the secondary market similarly to bonds, but differ in terms of documentation. They are typically issued under a programme that lets borrowers tap the market quickly.
The offshore entities do not need approval to raise funds offshore and most of the proceeds are said to be kept offshore. In contrast, a Chinese bank requires approval to issue offshore renminbi bonds through its mainland entity.
“Chinese banks need State Council approval to raise funds via their mainland entity — and this is a lengthy process which usually takes months, which is why the issuance usually comes during the second half of the year,” said Liu.
The dim sum market offers substantial cost savings compared to the onshore market. “The onshore deposit rate set by the PBoC is 3.5% and 4.5% for one-year and two-year deposits, respectively. If the Chinese banks want to tap the dim sum market with one- to three-year paper, they can expect to pay 1% to 2%, which results in significant cost savings,” said Liu.
She added that the policy banks — which have closer ties to the government compared to the listed Chinese banks — might also be looking to tap the market to set up a benchmark and to further develop the offshore renminbi bond market.
Allowing funds raised offshore to be remitted onshore does create arbitrage opportunities for borrowers — something the Chinese government has been particularly keen to clamp down on. However, bankers speculate that the government does not want important projects to stall as a result of tight liquidity and is vetting the applications closely on a case-by-case basis.
“My suspicion is that the mainland government wants to accelerate the progress of certain projects that are critical to the economy — which is why they are asking banks to spell out the use of proceeds for dim sum bonds,” said the debt banker.
While the dim sum bond market might not pay high fees, investment banks are focusing their resources on it as they see the potential for issuance to spike during the next few years.
According to a research report by Bank of America Merrill Lynch, the offshore renminbi bond market has grown quickly this year, already doubling the total issuance seen in 2010. To date, the market has seen Rmb88.6 billion of issuance for a total outstanding market size of Rmb144 billion.