Taiwan nears Formosa bonds landmark

The Hong Kong units of China's Bank of Communications and Agricultural Bank of China are set to issue Formosa bonds, with more mainland entities likely to follow.

The first Formosa bonds issued by Chinese companies are set to begin trading on December 10, giving Taiwan’s bond market a boost and setting a precedent for other mainland issuers.

Bank of Communications Hong Kong and Agricultural Bank of China Hong Kong last week priced a total Rmb2.7 billion ($443 million) in dual-tranche notes issued in Taiwan, the first such sale after the island authorities last week lifted a ban on mainland Chinese issues of Formosa bonds.  

More issuers, including China Development Bank and Bank of China, are expected to follow suit.

BoCom Hong Kong raised Rmb1.2 billion of 3-year 3.4% and 5-year 3.7% bonds, while ABC Hong Kong issued Rmb1.5 billion of 3-year 3.3% and 5-year 3.6% notes.

Taiwanese banks, especially those with large outstanding Rmb deposits, such as Mega International Commercial Bank and CTBC Bank, will likely benefit from the issues, according to a Moody’s Investors Service report.

The Formosa bonds will allow Taiwan’s banks to diversify their Rmb  assets and better match their assets and liabilities in the currency, Moody’s said.

Based on the experience of Hong Kong’s equivalent Dim Sum bond market, large bond issues sold by major Chinese banks often offer longer tenors and higher yields over interbank rates. As a result, Taiwanese banks may benefit from a yield pick-up on the Formosa bonds they buy, which will in turn help improve the margins on their Rmb books, the US credit ratings agency said.

The Rmb  deposit balance of Taiwanese banks reached Rmb123.25 billion at end-October, far surpassing their Rmb loan-book of Rmb9.52 billion. Up until now, the resulting surfeit has been mainly placed in the interbank market and sometimes in Dim Sum bonds too, but Taiwanese banks will now have access to a broader array of investment options as the Formosa bond market expands.

The two pioneering Formosa bond deals from BoCom and ABC were arranged by HSBC Taiwan and CTCB Bank, respectively.

Mainland Chinese banks, in turn, will gain broader access to offshore Rmb funds as the Formosa bond market develops, enabling them to fund their growing offshore Rmb loan business. Here too the experience of Hong Kong is instructive. More than 55% of Dim Sum bonds issued in the last two years were from Chinese policy banks or big Chinese commercial banks.

Taiwanese exchange Gretai Securities Market last week announced new rules for mainland issuers to issue Formosa bonds, reversing previous policy. Under the new scheme, the Chinese subsidiaries of Taiwanese-listed companies and banks, Chinese policy banks, state-owned commercial banks and joint-stock commercial banks can issue offshore Rmb bonds to institutional investors in Taiwan.


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