London sees red as China executes offshore bond

The City of London cements its status as Europe's premier renminbi centre as China takes a new step to internationalise its currency.
Red skies at night: London's delight
Red skies at night: London's delight

The City of London cemented its status as Europe's leading renminbi centre on Thursday after China's Ministry of Finance (MOF) raised Rmb3 billion ($458 million) through a three-year bond deal.

The deal size may have been small by eurobond standards but the transaction was a meaningful one for both China and the UK. 

For China, it marks a new step in the internationalisation of its currency given the MOF has only ever issued once offshore before; in Hong Kong back in 2009. For the UK, the deal should help ensure the City of London remains the pre-eminent global financial centre at a time when financial power is shifting progressively eastwards.

Bank of China and HSBC were the two lead managers for the offering, which was announced on Wednesday. In a break with recent precedent, it was also syndicated like a standard eurobond rather than priced via an auction process.

The leads began securing indications of interest during Asian hours on Thursday, building up a peak order book of Rmb9.5 billion based on an indicative yield of 3.4%. Demand then fell back to Rmb8.5 billion by the time the book closed after guidance was narrowed to the final issue price of 3.28%.

Pricing was benchmarked on the MOF's outstanding 2.6% June 2019 dim sum deal, which was trading on a bid/offer yield of 3.45%/32.5% on Thursday. Bankers said this price did not move during the course of the day as the deal is now fairly illiquid. 

Bankers said the MOF had two objectives when it came to distributing this deal. Firstly, they wanted to make sure it was allocated to international accounts and secondly they want it to remain liquid rather than become a "museum piece".

They added that Chinese banks placing orders were required to specify which branch they were coming from so the ministry could pinpoint which countries bonds were being allocated to. 

As a result, 58% of the deal was placed into EMEA and 42% into Asia. By investor type, banks took 55%, central banks and other official institutions 41%, fund managers 3% and private banks 1%.

The strong showing from central banks is also a reflection of the renminbi's growing international presence. The currency will be formally included in the IMF's basket of reserve currencies from October, which means more central banks are likely to start holding it as part of their reserves. 

Last month, HSBC published a survey of 77 central banks, which revealed that 56% are now holding renminbi as part of their reserves, up from only 5% four years ago. Within 10 years, reserve managers said they expect the currency to account for 10% of overall holdings. 

In a further sign of the currency's growing international acceptance, the deal will also be classified as Level B collateral for repo purposes under the Bank of England's Sterling Monetary Framework. The only non-European countries that also classify are Australia, Japan and New Zealand. 

The MOF deal follows in fairly quick succession from a debut offshore renminbi-denominated offering by the People's Bank of China, which was timed to coincide with President Xi Jinping's visit to the UK last October.

That Rmb5 billion deal had a much shorter one-year tenor but built up a much bigger Rmb30 billion order book. Pricing was fixed at 3.1% compared to an indicative yield of 3.3%. The leads were HSBC and ICBC.

London still has a long way to go before it can rival Hong Kong as the premier offshore renminbi centre. But it has recently managed to overtake Singapore as the world's second largest Rmb FX hub.

According to Swift figures, London accounted for 6.3% of offshore activity in March, compared to 4.6% in Singapore and 72.5% in Hong Kong. 

However, Swift data also shows that the renminbi may be on a bumpier and longer march to global domination than the government is hoping for. Its data for April also showed that the renminbi had dropped down one place in the global rankings as a payments currency, swapping places with Canada and falling to sixth place on a market share of 1.82%. 

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