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Beijing has approved plans by two policy banks to raise a total of Rmb15 billion from offshore renminbi bond market in an effort to revive economic growth by financing public works projects.
China Development Bank, the biggest of the country's three policy lenders by assets, will raise Rmb5 billion in renminbi-denominated bonds in Taiwan, the National Development and Reform Commission, the state economic planner, said in a statement on Tuesday.
In a separate statement the NDRC said the Agricultural Development Bank of China, a policy lender focused on food security and agricultural development projects, received approval to raise Rmb10 billion on the offshore renminbi bond market to fund hydropower and grain projects. The statement did not mention a timetable for ADBC's bond issuance or where it will take place.
Diminishing returns
China market watchers generally welcomed the policy lenders' proposed bond sales to fund infrastructure projects but also noted diminishing economic returns from fixed asset investment.
“The move should open up another channel of long-term financing for infrastructure projects, apart from the usual bank lending, municipal bonds and private-public partnerships,” Hongbin Qu, chief China economist at HSBC, said in an August 5 research note. “The proceeds, mostly used as seed capital, should help generate a recovery in investment growth in the coming months.”
HSBC expects bond issuance by the policy banks to amount to as much as Rmb300 billion this year, with the lenders' bond programme forecast to reach Rmb1.5 trillion.
Sounding a more cautious note, Credit Suisse economists expect the latest round of “mini stimulus” to ultimately raise as much as Rmb3 trillion as China's commercial banks continue to show a reluctance to fund low-yield long-term projects.
"How to re-engage investment interest from the private sector remains to be seen, as the multiplier effect has declined," said Dong Tao, a Credit Suisse China economist.
The Swiss investment bank's Rmb3 trillion projection envisions China Development Bank issuing Rmb2 trillion in special policy bonds while Agricultural Development Bank will issue bonds worth Rmb1 trillion.
Tao of Credit Suisse expects the big-four state-owned lenders and the Post Saving Bank will buy the bonds.
China’s commercial banks have snapped up 80% of the Rmb10.6 trillion in outstanding policy bank financial bonds, according to data from Credit Suisse.
To finance long-term infrastructure projects, the bonds are expected to be long-term bonds, and the tenor could exceed 10 years.
The NDRC approved about Rmb10 trillion worth of infrastructure projects in late 2014, identifying seven key target industries related to environmental protection and clean energy.
Taiwan’s special appeal
Taiwan’s formosa bond market has drawn keen interest from international borrowers this year, after the island’s lawmakers passed new rules in May last year to exclude foreign-currency bonds issued in Taiwan from the oversea's quota.
The relaxation of investment rules allow Taiwanese insurers to buy bonds that offer a higher coupon, as annual premium income more than doubled in the past ten years.
Adding to a relaxed regulatory environment, a strong demand for renminbi-denominated assets also supported formosa bond issuance, as yuan deposits have steadily increased since the island joined the offshore reminbi business two years ago.
Taiwan’s yuan deposits hit a new high of Rmb338.22 billion in the end of June, up modestly from Rmb336.29 billion in May, according to official data.
Overseas borrowers including Morgan Stanley and Goldman Sachs have raised $4.52 billion in 42 deals this year, surpassing the total $3.39 billion raised last year in 15 transactions, according to data provider Dealogic.
Bank debt issuance captured the 10 largest deals in Taiwan’s formosa bond markets this year, allowing the borrowers to tap the inexpensive funding source before a widely-anticipated US interest rate hike later this year.
