HK – Eurobond Market

Posted on September 21, 2010 at 3:09 AM

In 2003, retail banks could convert their HK dollars into RMB for the first time. Seven years later, we see HK emerging as an offshore RMB center with the growing RMB Eurobond market (RMB bonds issued in Hong Kong) being a key element. The deposit base has jumped spectacularly to Rmb103.7 billion ($15.2 billion) today from a little more than Rmb20 billion in 2007.

Deutsche Bank became the first non-Asian bank to issue an RMB Eurobond last week, with a Rmb500 million ($73 million) deal for China Development Bank, and the first non- bank and corporate deals have also appeared in the past couple of months. RMB convertibility was extended to the corporate sector, with a pilot scheme launched in June 2010 allowing trade between Hong Kong and China to be settled in RMB, rather than US dollars.

In China's domestic bond market, a quota is likely to cap supply of high yielding fixed income products, leaving a fair proportion of demand unfulfilled. Hong Kong's RMB Eurobond market would serve as a buffer in this situation,  providing RMB funding for borrowers and improved rates of return for deposit holders.

RMB Eurbond comes with its advantages. RMB Eurobond issue is the quickest way to raise RMB funding with an average time table of 4-6 weeks. It would also eliminate foreign exchange risk for a company with RMB liabilities. While trade can be settled in US dollars, the foreign exchange conversion rates employed onshore can sometimes be inefficient – settling in RMB can result in a more favorable cost of goods. For development and export banks, RMB Eurobonds offer a means to diversify their funding base and build profile. Meanwhile, Chinese state-owned enterprises are looking at this market as an alternative source of financing, provided they can bring proceeds on-shore cheaply.

For bond issuers looking to convert RMB proceeds into US dollars, there is an interesting difference between the conversion rates of the dollar in the domestic Chinese market and dollar in HK market. Because demand for RMB in Hong Kong is greater, the latter is currently trading at a slight premium to dollar, meaning borrowers get more US dollars for converting their RMB than what they would on-shore in China. If issuers wish to send RMB proceeds to the mainland, an approval by the State Administration of Foreign Exchange (SAFE) is required, (which can be obtained) provided certain criteria are met.

Despite the rise of RMB Eurobond market, experts state that there would be the parallel existence of the HK dollar market, which is likely to stay as long as the HK dollar exists.

The steady supply of government RMB Eurobond issuance to date suggests that officials are serious about developing this market and creating a benchmark yield curve. Ever-increasing deal sizes and tenors ensure the correct foundations are being laid to encourage participation by a broader range of issuers.

It can be concluded that there is significant potential for Hong Kong's RMB deposit base to grow with the demand for RMB Eurobonds.

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