Dim sums won't be bite-size thanks to China's might

If there was any doubt about China’s commitment to the dim sum bond market, it was dispelled yesterday during a symbolic visit to Hong Kong by vice-premier Li Keqiang.

Widely tipped to be China’s next premier, Li is in Hong Kong for a three-day visit and took the opportunity to promise continued support for the development of the offshore renminbi bond market and give the official green light for mainland companies to issue dim sum bonds. He also indicated that China will expand the issuance of Treasury bonds.

“Mainland Chinese companies have gotten an official green light to issue offshore renminbi bonds,” said Donna Kwok, an economist at HSBC. “Previously, they were never banned from applying for permission in theory, but there was no clear channel for them to remit funds and it never happened. Now, there is clarity on the matter and it is a signal for them to go ahead. Li Keqiang’s visit and the measures he announced were symbolic and showed unequivocal support for Hong Kong.”

Before this, only mainland financial institutions and overseas companies were able to issue renminbi bonds in Hong Kong, Kwok also noted in her research report.

There were also other reasons for the Chinese government to celebrate. The visit coincided with the Ministry of Finance’s (MoF’s) Rmb20 billion dim sum bond auction — its third and largest offshore renminbi bond to date — and yesterday the Rmb15 billion ($2.3 billion) institutional tranche closed successfully and achieved a low cost of funding.

The auction attracted Rmb69 billion worth of bids during the one-hour auction period. The institutional tranche comprises a Rmb6 billion three-year piece sold at 0.6%, a Rmb5 billion five-year piece sold at 1.4%, a Rmb3 billion seven-year piece at 1.94% and a Rmb1 billion 10-year bond sold at 2.36%. Bank of Communications was the lodging agent.

The finance ministry’s multi-tranche issue will help the Chinese government set up a risk-free curve in the offshore market. “It’s another step in the evolution of the market. Although it’s probably a ways off, we could see bonds pricing on a spread basis over offshore government bonds,” said one banker.

It was also the first time the ministry had introduced a benchmark seven-year tenor to institutional investors. Seven years is a key maturity in the onshore government bond funding curve.

“We think the introduction of the seven-year tenor in the offshore market not only will fill the demand for duration in this sector in the offshore market, but will also help align MoF’s liability profile both in the offshore and onshore markets,” said Deutsche Bank in an August 15 report.

The three-year tranche came much tighter than the street was expecting. Investors who buy dim sum bonds for appreciation usually prefer three-year paper and the tight pricing reflected this. According to the Deutsche Bank report, the fair value yield for the three-year bond was 1% to 1.1%.

The finance ministry will start auctioning its Rmb5 billion two-year retail bonds from today to August 31. Bank of China and HSBC are joint global coordinators and arrangers for the retail tranche. Agricultural Bank of China, Bank of Communications, CCB Asia, ICBC Asia and Standard Chartered are also joint arrangers for the retail bond.

Otherwise, a growing universe of issuers is taping the dim sum market. Hainan Airlines kicks off a roadshow in Hong Kong tomorrow and will move on to Singapore on Friday. The company could issue an offshore renminbi bond after roadshows are completed. Deutsche Bank and J.P. Morgan are joint bookrunners for the deal.

Elsewhere, Hong Kong-listed solar company Solargiga Energy is also planning to issue an offshore renminbi bond through Sinopac Securities. The company is rumoured to be selling a Rmb300 million three-year bond with pricing guidance said to be around the region of 4.75%.

This, according to one rival, looks very tight compared to LDK Solar’s synthetic offshore renminbi bonds, which are trading at a price of 86 and yielding 17.8%. LDK Solar is not a precise comp as its bond is renminbi denominated, but settled in dollars. It is also a bigger company with a market capitalisation of close to $1 billion, whereas Solargiga’s market cap is HK$2.8 billion.