RMB offshoring gathers pace

Over the past couple of years, the issuance of offshore RMB bonds has soared, with levels expected to reach the equivalent of 360 billion yuan this year. To address the growing interest from international investors, a number of markets - in particular Taiwan and Singapore - have established offshore RMB centres in an attempt to capture a share of this lucrative business.

Taiwan launched an offshore RMB bond (known as a ‘baodao’) service in August 2012, and followed this up in December 2012 with the announcement that the Bank of China’s Taipei branch had been appointed as an RMB clearing bank. Despite the steady growth of yuan deposits - recently peaking at over 60 billion yuan - the baodao market has yet to match the generally upwardly mobile trend of offshore RMB growth.

Foreign investors, which are not very active in the Taiwanese dollar bond market, may be even more hesitant to invest in the new offshore RMB bonds due to concerns about low yields, lack of liquidity and local regulatory restrictions. Nevertheless, their participation is important in building secondary market activity for these securities.

Singapore launched its offshore RMB service even more recently, in May 2013 with the Industrial and Commercial Bank of China (ICBC) designated as the market’s RMB clearing bank.

There have been two large ‘lion city’ bond issuances since then, but the question again persists over their appeal to international investors. Many lion city bonds offer lower yields than a number of popular investment funds composed of Asian sovereign debt.

Low yields are a short-term obstacle since yields are converging. In order to gain a foothold in the offshore RMB business, markets such as Taiwan and Singapore need to successfully court sources from both the supply and demand sides. Issuers want low issuance costs and a simple, yet risk adverse, system that provides the broadest possible access to targeted investors.

On the other hand, investors want maximum return on their investment. The risk-versus-reward ratio becomes paramount as does the ease with which they can access their chosen markets. Indeed, domestic issuers and investors can serve as the foundation for the development of new offshore RMB centres, but only the participation of foreign investors and issuers – including Chinese companies – will enable these new centres to grow significantly.

Successfully negotiating entry into the offshore RMB issuance business requires a way to move the currency beyond its natural border. The two biggest and most successful centres for offshore RMB issuance are Hong Kong and the international central securities depositories (ICSDs), in particular Euroclear Bank whose clients own 75% of the total ICSD holdings of RMB bonds.

Their popularity can be attributed to certain key factors. Hong Kong has been a leading international financial centre for over a decade. It boasts a state-of-the-art financial infrastructure and is in close proximity to mainland China, making it the obvious choice for investors seeking to take advantage of the increased popularity of the yuan.

The ICSDs form a critical part of the global capital market infrastructure and have been present in Asia for close to 30 years. They have extremely high levels of knowledge, expertise, automation and efficiency in managing the issuance of multi-market securities, such as Eurobonds, in multiple currencies.

RMB issuers are attracted to the ICSDs because of their well-established international investor reach, expertise in cross-border securities issuance as well as the legal and operational certainly provided. Issuers also find a good match with their conservative approach to risk management.

Even with peaks and troughs in offshore RMB issuance, the overall trend in demand remains robust. Despite the best attempts of new markets to challenge the two established offshore RMB issuance centres, we believe the benefits of proximity and safe international investor reach via Hong Kong and the ICSDs, respectively, will be hard to match. Instead, new centres should leverage their unique strengths to capture their share of the growing offshore RMB business.