KfW deepens offshore renminbi market

Frankfurt-listed dim sum bonds should increase further the Chinese currency's exposure to investors across Europe.

The dim sum bonds listed in Frankfurt by KfW, a first for continental Europe’s finance capital, are a further step in promoting the region as an important market for the currency.

KfW, the German state-owned development bank, raised Rmb1 billion ($162 million) on Tuesday by issuing renminbi-denominated bonds in Hong Kong. The bond, with a maturity of 2 years, was priced at 1.375%.

The bonds are expected to increase further the exposure of the Chinese currency to investors across Europe, complementing London – the other emerging hub in the region for renminbi trading.

KfW’s notes - rated Aaa by Moody's, and AAA by Standard & Poor’s and Fitch - are guaranteed by the German government. Commerzbank and Deutsche Bank acted as joint lead managers of the transaction.

The bonds come as the Chinese government is attempting to hasten renminbi internationalisation. China and Germany on March 28 signed a memorandum of understating (MoU) to establish a renminbi clearing and settlement mechanism in Frankfurt. Meanwhile, London is also being touted as an offshore renminbi center through a MoU with Beijing.

“Europe traditionally has a strong tie with China and Frankfurt is an important financial center in Europe. Indeed, the European Central Bank is located there. It shows the renminbi market continues to grow,” said Vijay Chander, an executive director with the fixed income department at the Asia Securities Industry & Financial Markets Association (Asifma).

In addition to Europe, other offshore renminbi markets have functioned well. Latest data indicates that Singapore has overtaken London as the second largest offshore renminbi clearing center after Hong Kong with an increase in payments value by 375% between March 2013 and March 2014, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT).

Taiwan, meanwhile, also continues to grow in importance in this regard. While the offshore renminbi deposit base in Taiwan of $39.7 billion at the end of February 2014 is one-fourth of the total renminbi deposit in Hong Kong, the rate of growth in Taiwan has been faster, based on a report by Asifma.

However, some investors have concerns that efforts to encourage more two-way flexibility will make the renminbi susceptible to volatility.  The currency has depreciated about 3% this year, diverting some interest from issuers and investors to US dollar-denominated bonds.

But others disagree. Crystal Zhao, a credit analyst with HSBC, does not think renminbi volatility is a crucial issue. “The recent renminbi depreciation has little impact on the bond market, based on the issuance in the primary market as well as the performance in the secondary market,” told FinanceAsia

Meanwhile, Asifma’s Chander said that investors are now more sophisticated and don’t buy only based on expectations of currency appreciation. “They also buy on the basis of the individual issuer’s credit quality,” he said.

For the first quarter of 2014, an equivalent of $15.5 billion in dim sum bonds have been issued, nearly half of total 2013 issuance alone ($33.5 billion) and a new record high for the quarter, according to the Asifma report.

China Power International Development priced Rmb2 billion dim sum bonds on Tuesday, ending the Rmb13.6 billion spree in dim sum issuance in April.

The three-year bonds were priced at 4.5%. The deal received demand of Rmb5.3 billion from 75 accounts. Investors were from Hong Kong (88%), Singapore (6%) and other markets (6%). 

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