Over the past few years, the development of RMB (Chinese Yuan) denominated bonds issued offshore (generally referred to as "Dimsum bonds" in the capital markets) has seen exponential growth. We examine the drivers of this growth and how the market has developed and benefitted from regulatory influences and market participation.
1. "Exponential" Growth of the Dimsum Bond Market over Five Years
In 2007, when Dimsum bonds were introduced, issued volume was around RMB 10,000 million. 2009 saw gradual growth to around RMB 16,000 million.
However, 2010 saw an "exponential" rate in Dimsum bonds. Issued volume was over RMB 41,000 million (a 250% increase over 2009). In 2011, this skyrocketed to over RMB 166,000 million, a 300% increase.
Of note is that in 2011, particularly in the 2nd half when the debt capital markets and equity markets experienced a significant slowdown, the Dimsum bond market continued to show resilience.
What has driven this phenomenal growth? The financial regulators of the People's Republic of China (PRC) and the Hong Kong Special Administrative Region (Hong Kong) have been instrumental in driving and facilitating the growth of the Dimsum bond market through various cooperative initiatives.
2. Key Regulatory and Market Developments
Since 2002, the PRC and Hong Kong governments have introduced a number of regulatory initiatives to facilitate the "internationalization" of the RMB. Such initiatives contributed, in fact, to the remarkable development of Dimsum bonds, although the regulators may not have predicted how fast it has grown over just a few years.
The offshore RMB market was subsequently introduced in December 2003 when PRC and Hong Kong allowed Hong Kong's banks to provide retail RMB services of deposits, remittances, and credit cards to residents in Hong Kong.
Since then, several important initiatives were taken by the PRC and Hong Kong governments. In June 2007 in Beijing, financial entities incorporated in PRC gained permission to issue Dimsum bonds in Hong Kong. This was an "Interim Measure jointly formulated by the People's Bank of China (PBOC) and the National Development and Reform Commission (NDRC)" that granted this permission to enable PRC financial institutions (particularly PRC banks) to issue Dimsum bonds in Hong Kong. This was also the first key regulatory development for the Dimsum bond market.
Two years later, in July 2009 in Hong Kong, a pilot scheme was launched by the Hong Kong Monetary Authority (HKMA) to encourage cross-border trade settlement in RMB, gradually allowing steady development of the offshore RMB market which has in turn led to increased demand for RMB denominated financial services. This has also caused the RMB deposit base in Hong Kong to grow exponentially, hence strengthening the supply-demand dynamic of Dimsum bonds.
A brief chronology of the key regulatory initiatives and market developments of the Dimsum bonds market (June 2007 - 2011) is illustrated in the table below:
June 2007 | PRC regulators announced the Interim Measure jointly formulated by the People's Bank of China (PBOC) and the National Development and Reform Commission (NDRC) which allowed PRC financial entities to issue Dimsum bonds in Hong Kong. |
2007 ~ 2009 | PRC banks (such as China Development Bank, China Export-Import Bank, Bank of China, China Construction Bank, Bank of Communications of China, Bank of East Asia China, HSBC Bank of China, among others) started issuing Dimsum bonds in Hong Kong. |
July 2009 | A pilot scheme was launched in Hong Kong by the Hong Kong Monetary Authority (HKMA) to encourage cross-border trade settlement in RMB, gradually allowing steady development of the offshore RMB business which led to increased demand for RMB denominated financial services. |
October 2009 | PRC's Ministry of Finance launched three tranches of Dimsum bonds totaling CNH 6 billion (USD 897 million) to retail and institutional investors in Hong Kong. This was PRC's first CNH denominated sovereign bond offering outside of PRC and the largest offshore RMB bond as of November 2011. The issue was very well received by investors (3-times oversubscribed) and extended the CNH curve from 3 to 5 years. (Note: CNH detonates Renminbi in Hong Kong to be distinguished from Renminbi in mainland China.) |
July 2010 | HKMA further clarified the supervisory principles and expanded operational arrangements of cross-border RMB fund flows and the development of the RMB business in Hong Kong (including issuance of RMB bonds in Hong Kong). Pursuant to these supervisory principles, any entity, (local or foreign), was permitted to issue Dimsum bonds in Hong Kong. This regulatory measure facilitated the development of Dimsum bonds in Hong Kong, triggering the "diversification" and "internationalization" of Dimsum bond issuers. This landmark regulatory initiative also opened the doors to issuers from corporations as well as banks in Hong Kong and globally. |
July 2010 | Hopewell Highway Infrastructure Limited completed its Dimsum bonds issue, marking the "first" corporate issuance in accordance with the "July 2010" supervisory principles (described above). |
September 2010 | A CNH 200 million bond issuance by McDonald's hit the Dimsum bond market. It recorded the first Dimsum bond issuance by an overseas non-financial corporation. The proceeds from the offering were successfully remitted to PRC. This offering signified the emergence of a new funding channel for international companies to raise working capital for their PRC operations and also for their general corporate funding purposes by way of swapping the RMB proceeds into U.S. dollars or other currencies. Since then a good number of multi-national corporations and financial institutions successfully tapped on the Dimsum bond market from Europe, U.S.A., Korea, Japan, and more. |
October 2010 | The Asian Development Bank (ADB) launched a CNH 1.2 billion (USD 180 million) bond with a tenor of 10 years at an annual coupon of 2.85%, extending the CNH curve from 5 years to 10 years. This was also the first Dimsum bond to be listed on the Stock Exchange of Hong Kong (HKSE) and also its first Dimsum bond issuance. PBOC raised PRC onshore lending and deposit interest rates for the first time since 2007. |
November 2010 | The PRC Ministry of Finance (MOF) issued CNH 5 billion of government bonds to institutional investors as part of its plan to set a benchmark yield curve for other Dimsum bonds. MOF also offered CNH 3 billion to retail investors. This offering by MOF, which was known to come at a time when PRC was not in need of funding, demonstrated the PRC government's commitment to internationalize the RMB. |
December 2010 | The RMB trade settlement scheme was further expanded to increase the number of Mainland Designated Enterprises (MDEs) to 67,359 companies from 365, furthering the flow of RMB outside of China. It helped RMB to flow into Hong Kong to support the growing supply of Hong Kong RMB (CNH) (including deposits). |
January 2011 | Following the growth of Dimsum bond issuances in 2010, aggressive restrictions on PRC bank lending have dried up RMB liquidity in PRC. Rising costs in PRC funding sources and uncertainty concerning PRC entities' access to PRC loans and other fundings in Mainland made the then low-yielding, fixed rate Dimsum bonds a very attractive alternative for various types of issuers. |
August 2011 | Vice Premier of PRC, Le Ke Qiang, visited Hong Kong and expressed that the PRC central government would expand the Dimsum bond market by permitting PRC onshore corporations to issue Dimsum bonds in Hong Kong, and clarifying and expanding RMB repatriation routes, as well as expanding the scope of cross border RMB settlement cities to the whole of mainland China. |
October 2011 | PBOC and the Ministry of Commerce of PRC (generally known as MOFCOM) issued two circulars to clarify and further "simplify" the procedures and approval and/or notice requirements regarding the repatriations of RMB into and outside of PRC. |
2011 (Whole Year) | In 2011, the Dimsum bond market has seen over CNH 166 billion of issuance, more than triple of the total 2010 issuance of RMB 41.2 billion (USD 63.4 billion). ADB's 10 year Dimsum note issued in Oct 2010 and MOF's 10 year notes issued in Dec 2010 and Aug 2011 are the longest dated Dimsum bonds (as of December 2011). |
The rapid growth of the Dimsum bond market in terms of volume and simultaneous development in RMB-denominated product types support the PRC and Hong Kong regulators' policy measures to internationalise the RMB.
The policies of the PRC government and Hong Kong regulators' concurrent policy initiatives to internationalize the RMB, coupled with expectations of further appreciation in the RMB, have driven the growth of the market.
Pioneer investors considered Dimsum bonds as a currency play expecting that RMB would appreciate against other currencies and did not pay good attention to the bonds' credit risks. As such, they were more interested in buying bonds with tenors of less than 3 years- the length of time that:
1. Coincides with a timeframe during which investors in RMB bonds expected the currency to appreciate, and
2. Reflects investor hesitancy to buy longer tenors in the absence of
i. long-dated, offshore RMB liabilities,
ii. hedging instruments for long-tenor exposures, or
iii. a swap market for hedging.
Also to the benefit of the issuers, yields were moved to a point where some first-time issuers were able to raise money at lower rates than other funding sources as some of them experimented with synthetic structures to extract the lowest yield with weak covenants to issue the bonds.
3. Policy Initiatives to Continue Supporting Growth of the Dimsum Bond Market
As we have discussed, the initial growth rate of the Dimsum bond market was gradual, from inception up to mid-July 2010 and from that point, RMB deposits and Dimsum bond volumes experienced exponential growth. Two key regulatory factors have facilitated this growth:
- The HKMA permitted trade settlements in RMB that enabled RMB deposits in Hong Kong to increase and boosted diversification of issuers of Dimsum bonds; and
- The PRC government liberalized trade settlements which significantly expanded the RMB deposit base in Hong Kong to buy Dimsum bonds and RMB remittance approval procedures.
As at December 2011, the market's new issuance of Dimsum bonds has accelerated to over RMB 166 billion, with total outstanding issuance standing at RMB 208 billion. The range of Dimsum bond issuers has also diversified from China and Hong Kong; from McDonald's (in the United States), to Volkswagen (in Germany), to BP (in the UK), just to name a few.
Looking back how the market has evolved over the past few years, it would seem clear that the two regulators (the PRC regulators on the one hand and the Hong Kong regulators on the other hand) have played critical roles in accelerating the growth and development of the market. We believe this is part of the PRC government's plan to "internationalize" the RMB and position it as a key global currency, a plan that appears to be working well.
It is also expected that the two regulators will continue working together to grow the Dimsum market moving forward. Such an expectation is warranted, especially since the PBOC and MOFCOM of the PRC government have recently (October 2011) announced two separate circulars to streamline and clarify RMB repatriation approvals and procedures.
By Jay Lee
Jay Lee is the Head of Debt Capital Markets Legal For North East Asia at Standard Chartered Bank.