Hong Kong was initially a testing ground for China’s financial reforms. Since then, it has grown to become a major offshore RMB financial center. Hong Kong is currently the only place in the world outside of mainland China that contains a closing center for dim sum bonds (the HKMA’s Central Moneymarkets Unit (CMU)) and has permission to issue dim sum bonds. The Euroclear and Cedel systems can serve international investors only because they have a link to the CMU.
The PRC policy to promote RMB use in the international market continues to fuel the demand for dim sum bonds. This trend of RMB outflow can be seen in cross border trade, offshore consumption by PRC residents, currency swaps, RMB cross-border trade settlements, RMB settlements of outbound direct investments, and the listing of foreign companies in China. As the availability of offshore RMB bank accounts and offshore pools grows, so does investor interest in dim sum bonds. Such high demand for these bonds in the past year, especially from private-banking clients, has led to an oversubscription of these issues. Meanwhile, Chinese issuers continue to save as much as 2-3 per cent on their dim sum bonds compared with their U.S. dollar borrowings at the start of 2011.
Developments in the dim sum bond market have been dramatic. In 2010, only 16 issuers issued RMB 36 billion in dim sum bonds in Hong Kong. Yet at the end of January 2011, a total of 31 RMB bonds were issued with an issuance size of around RMB 74.4 billion (about USD 11.5 billion). By the end of July 2011, the outstanding volume of offshore RMB bonds jumped to RMB 135 billion (around USD 21 billion) and is expected to reach RMB 200 billion (USD 31 billion) by the end of 2011, according to a recent IFR Asia Report.
Despite the recent drop in dim sum bond prices, the dim sum bond market is expected to continue to expand as long as there is a surplus of RMB deposits offshore. More multinational corporations may return for a second round of dim sum funding following the successes of U.S. heavy-equipment manufacturer Caterpillar, which printed its second deal in June 2011. More issuers may join the market simply to convert their dim sum proceeds into U.S. dollars at an overall, lower funding cost. There has even been interest from the Islamic finance world with the Khazanah RMB 500 million sukuk run by the Bank of China International Holdings Ltd., CIMB Bank and Royal Bank of Scotland. While there may only be rare demand for issuers who require an Islamically structured debt instrument (Khazanah is the Malaysian sovereign wealth fund which is keen to promote Islamic finance), this issuance is only one of the many alternative structures available in the dim sum bond market for new investors. Additionally, there may be future opportunities for investors based in the Middle East looking to raise RMB funds for their Chinese investments.
In the near future, the PRC may even push for offshore RMB transactions outside of Hong Kong. London has already taken steps towards becoming the new offshore RMB trading hub for Europe as it recently attempted to secure a swap line with the PBOC. Following Kazakhstan’s recent addition to the list, there are 12 countries that currently hold bilateral currency swap lines totaling RMB 841.2 billion with China for three years.