Hopewell Highway pioneers offshore renminbi bonds

Hopewell Highway Infrastructure is set to become the first company to sell bonds denominated in renminbi to international investors. The Hong Kong-based toll road company will start marketing the bonds today and will use the proceeds to help finance the construction of a project in China's Pearl River delta region.

The deal marks another important step in China's internationalisation of its currency and was made possible after Chinese regulators relaxed the rules on cross-border renminbi flows on June 17.

Hopewell Highway has moved quickly to be the first to market corporate renminbi bonds and said yesterday that the funds will be used to finance the third phase of its Western Delta Route, a highway project that will connect Guangzhou to Macau and pass through cities such as Foshan, Panyu, Shunde, Zhongshan and Zhuhai.

"The issuance of the first renminbi corporate bonds by HHI marks a milestone in the development of renminbi business in Hong Kong," said He Guangbei, vice-chairman and chief executive of Bank of China (Hong Kong), which arranged the deal. "It not only helps diversify the renminbi bond offerings and deepen the local bond market, but also strengthens Hong Kong's position as an international financial centre."

The new relaxed framework follows a pilot programme launched in July 2009 that allowed authorised institutions in five Chinese cities to use renminbi for trade settlement. Under those rules, cross-border renminbi flows were only approved for Hong Kong, Macau and Southeast Asia.

The June circular extended the rules to all foreign-invested enterprises and included cities in an additional 18 Chinese provinces. Cross-border settlement is also now widened to include all countries and regions, and is no longer restricted solely to trade finance but can be used for other transfers, including dividends from onshore businesses. This will pave the way for foreign companies to fund their operations in China through offshore renminbi bonds -- and, crucially, to use the profits from those projects to repay investors.

The Hong Kong government announced supervisory principles for the issuance of renminbi bonds in February, but until the June announcement it was not clear how issuers could either spend the money or service the debt. "Everyone had been puzzling about that," said a source with knowledge of the transaction. "This deal is an answer to that question."

Banks have been able to issue renminbi bonds since last year, but the extension of the rule to all companies is a significant development that will lower funding costs for foreign firms' Chinese operations. Hopewell Highway still needs approval to transfer the proceeds of its renminbi bonds into China, but the speed with which it has moved on this deal demonstrates the government's encouragement of such transactions.

"In the past, it was unthinkable for companies to get such approvals," said the source. "But this deal signals that if you're a good company, in an industry encouraged by the government, you can now do the unthinkable."

As such, it is no surprise that Hopewell Highways has won the coveted first deal. The highway it is building in the western Pearl River delta is a key infrastructure project in the heart of China's export industry. But, according to the source, there are a string of deals in the pipeline and prospective borrowers are enjoying the encouragement of governments in both Hong Kong and China.

"Everyone wants to get these deals done before Hong Kong's national day on July 1 because it's a symbolic date that marks the return of Hong Kong to the motherland," the source said.

Officials in Hong Kong have spent months researching the development of the Eurobond market in the 1960s and hope that this deal marks the opening of a market that might one day rival the offshore dollar market.

Linklaters is acting as legal adviser to Bank of China.