Since China’s vice-premier Li Keqiang and People’s Bank of China governor Zhou Xiaochuan unveiled new measures to encourage offshore renminbi bond issuance last week, mainland banks have been lobbying for their portion of the Rmb50 billion ($7.8 billion) dim sum bond quota set for the rest of 2011.
The new quota, which is to be split evenly between mainland companies and financial institutions, is said to have come as a surprise and has put a squeeze on Chinese banks’ funding plans.
Agricultural Bank of China, Bank of Communications, China Construction Bank, Bank of China and ICBC are all each said to have put in applications to raise Rmb10 billion to Rmb15 billion ($1.5 billion to $2.3 billion) with the authorities. However, under the new quota, mainland banks collectively will only be able to raise Rmb25 billion from the dim sum market this year.
Aside from the big five banks, the two policy banks — China Development Bank and Export-Import Bank of China — are also planning to tap the dim sum market and are expected to be given priority due to their policy role. “I suspect the policy banks are being given priority because they lend to the Chinese SOEs that are making acquisitions of strategic importance,” said one debt banker.
Chinese banks have big funding needs. China Construction Bank, for instance, received shareholder approval in June to raise Rmb80 billion through a subordinated debt issue during the next two years and, according to media reports, it plans to raise the bulk of that in the dim sum market.
China Development Bank and Export-Import Bank of China are expected to tap the market first with bond sizes of around Rmb5 billion to Rmb8 billion and they could issue through an auction process similar to the Ministry of Finance’s recent bond issue. Tapping the market first is an advantage as the cost of funding is expected to rise as the amount of outstanding issuance increases.
However, the new measures open the door for mainland companies to tap the offshore renminbi market, but there were few details as to which companies will qualify for this. As with bank issuance, market participants expect that state-owned enterprises will have priority.
The dim sum market continues to generate attention, particularly as it is the only market that is open at the moment. UK retailer Tesco successfully priced a Rmb725 million ($113 million) three-year dim sum bond at a yield of 1.75% yesterday evening. The guidance was said to be mid-to-high 1%. HSBC and Standard Chartered Bank were the arrangers.
Tesco is a high-grade borrower that is rated A3 by Moody’s and A- by S&P and Fitch, which appealed to investors given the current volatile markets. The senior bond issue is expected to be rated A- by S&P.
Elsewhere, Hainan Airlines is planning to raise Rmb1 to Rmb2 billion ($156 million to $312 million) through a dim sum bond issue. The bond is to be issued through a Hong Kong special-purpose vehicle and will be guaranteed by the onshore company. The company is said to be eyeing a three-year tenor and is expected to issue next week. Deutsche Bank and J.P. Morgan are joint bookrunners.
Taiwanese cement producer Asia Cement was also said to have held a roadshow in Hong Kong earlier this week. HSBC was the arranger.