China's Ministry of Finance (MOF) is planning its fourth offshore renminbi bond to raise Rmb25 billion to Rmb30 billion ($3.9 billion to $4.7 billion), to commemorate the 15th anniversary of the handover of Hong Kong to China, according to bankers. As the handover took place on July 1, many expect the issue to be launched around that time.
The upcoming bond is aimed at further developing the dim sum market and establishing a yield curve. However, this benchmarking exercise is likely to be more costly than previous ones.
According to Wind Info, a Chinese financial data provider, three-year onshore Chinese government bonds, which were yielding 2.84% at the start of this month, fell sharply to 2.25% on Tuesday on expectations of a rate cut. By comparison, the offshore renminbi-denominated MOF August 2014s were yielding 2.22% and the MOF August 2016s were yielding 2.40%. The MOF 2014s were issued at 0.6% in August last year but yields have since spiked by 1.6 percentage point. The MOF 2015s were quoted at 2.02% — but those bonds are highly illiquid and observers say the current yield doesn't reflect where they should trade.
During the past 18 months, onshore Chinese government bonds have traded at higher yields than the offshore bonds due to credit tightening onshore and a lack of supply in the offshore market. However, that trend shows signs of a reversal.
Given the sovereign’s status, most expect a bond from the Ministry of Finance to close successfully despite global volatility. In August last year, MOF succeeded in pushing through a Rmb20 billion dim sum bond despite the market rout. “It is the Ministry of Finance. I think the Chinese banks will buy it if nobody else does. They can get a better return for excess renminbi deposits,” said one banker.
Growing trade use of the offshore renminbi is also expected to support the issue. “I think the Ministry of Finance's bond will be well received. There is growing renminbi trade settlement worldwide and as a result, the amount of renminbi floating offshore — in Hong Kong, London and elsewhere — has increased and needs to be put to work. The MOF bond represents a safe way to invest,” said Ivan Chung, senior analyst at Moody’s.
"However, MOF will have to pay up compared to the last time it issued. Yields in the offshore market have risen. [But] this is a benchmarking exercise and not about cost savings. Also, the Chinese government wants to support the internationalisation of the renminbi and its bond gives offshore renminbi holders more investment options,” he added.
Investors previously bought dim sum bonds on expectations that the renminbi would appreciate. However, that has not always been true and investors are now wary of the possibility of further depreciation in the renminbi.
“The offshore renminbi has weakened by 1% against the US dollar in the past month. Greece presents tail risk to all portfolios. Last year, most people were certain Greece would not leave the European Union. This year, many think they will and the question is whether this will be Europe’s version of a Lehman collapse," said one Hong Kong-based investor. "Last year, we saw the offshore renminbi weaken by 2.5% in September amid Greece worries and we don’t know if the same thing will happen this year," he added.
Clearly, there will not be a repeat of last year's pricing. “The exceptional demand for the three-year offshore CGB [Chinese government bond] last year — which pressured it to yield as low as 0.6% — was partly due to expectations for renminbi appreciation within the next few years, with higher uncertainty longer-term,” Frances Cheung, Credit Agricole's senior strategist for Asia-ex Japan, wrote in a note. “Demand may not cluster around the short tenor again, but could be more even across the curve.”
If onshore yields continue to plunge, there will be less incentive for issuers to tap the dim sum market, particularly for those that have access to the onshore market. Bold predictions that the market would double in size were made at the start of the year, but so far this has not happened. According to Dealogic, the total dim sum issuance is $4.9 billion, just shy of the $5 billion raised during the same period last year. A total of $13.8 billion was issued in 2011 as a whole.
