JANUARY 19, 2011
GLOBAL CORPORATE FINANCE
The Current Menu for Renminbi Bonds in Hong Kong: Dim Sum or Synthetic?
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Table of Contents: OVERVIEW MARKET PERSPECTIVE SURGE IN RENMINBI DEPOSITS AND TRADE SETTLEMENTS IN HONG KONG GROWTH IN RENMINBI TRADE SETTLEMENTS SUBJECT TO REGULATORY MEASURES SURGE IN DIM-SUM BOND ISSUANCE DIVERSIFICATION OF ISSUERS THE “DIM-SUM SUBSTITUTE”: SYNTHETIC RENMINBI BONDS
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This report addresses recent developments in the offshore market for bonds denominated in mainland China’s currency, the Renminbi (RMB), whether settled in RMB or another currency. Called “dim sum” bonds when settled in RMB or “synthetic” if ...view middle of the document...
As of January 14th, 2011, however, the total outstanding issue of dim-sum bonds remained modest, at RMB66 billion (USD10 billion). Expectations of the RMB’s appreciation will drive demand for synthetic RMB bonds settled in U.S. dollars because investors value the exposure to a presumed strengthening of China’s currency. Some high-yield issuers, such as Chinese property developers, may favor synthetic RMB bonds over plain-vanilla, U.S. dollar issuance as an offshore funding channel. Until now, straight U.S.-dollar bonds have served as their mainstay for overseas funding.
HONG KONG 852.3551.3077
Dominique Gribot-Carroz 852.3758.1320 Vice President - Business Development Dominique.Gribot-Carroz@moodys.com Ivan Chung 852.3758.1399 Vice President -Senior Analyst Ivan.Chung@moodys.com
A Eurobond is defined as any bond denominated in a currency other than the place of issue.
GLOBAL CORPORATE FINANCE
The bulk of developers’ revenues come in RMB, but the real borrowing cost of U.S. dollar debt depends on the exchange rate at time of repayment. A synthetic RMB bond allows Chinese issuers to avoid exchange-rate risk and, at time of issuance, lock in borrowing for lower cost by transferring to investors the benefit of an expected future appreciation of the RMB.
The first so-called “dim-sum” bonds , denominated and settled in China’s currency, the RMB, but issued in Hong Kong, appeared in 2007. However, this dim-sum issuance has risen sharply since July 2010. So-called “synthetic” RMB bonds, denominated in RMB but settled in U.S. dollars (USD), have also come out. No matter whether settled in RMB or USD, we assign global-scale ratings to RMB-denominated bonds issued outside mainland China. While this report reviews trends in debt markets related to the RMB’s internationalization and further expected developments, we will soon also publish another comment to answer frequently asked questions on our approach to rating such bonds. In the past six months, several trends have emerged: » In Hong Kong, rapid growth of both RMB deposits and of monthly trade settlements in RMB has occurred after China’s central bank, the People’s Bank of China (PBOC), and the Hong Kong Monetary Authority (HKMA), issued a series of supportive regulatory measures. As shown below, in 2H10 a flurry of transactions for dim-sum bonds took place, with over thirty in Hong Kong totaling RMB41 billion (USD6.2 billion), more than double the RMB16 billion issuance for all of 2009. High demand from, for example, private-banking clients, has frequently led to oversubscription for these issues as supply has failed to keep up.
Annual issuance landscape of dim sum bonds
Total annual issuance 45 40 Total issuance no. 41 35 30
Size of issuance - RMB billion
35 30 25 20 15 10 5 0 2007 2008 2009 2010 10 12 16
20 15 10 5 0
Source: Moody’s Investors Service. “Dim-sum bonds” refer to RMB-denominated and...