The implementation of renminbi clearing in Taiwan promises to create a new trading hub and offshore capital market for the Chinese currency. Liquidity in the local market, however, remains shallow.
The renminbi business kicked off in Taiwan on February 6 this year, after the People’s Bank of China anointed Bank of China’s Taipei branch on January 25 as only the currency’s third clearing bank outside the PRC.
The clearing licence puts Taiwan on equal footing with Hong Kong and Macau, paving the way for the development of a new overseas capital market in the Chinese currency.
As of the end of last month, renminbi deposits in Taiwan had grown to Rmb56.9bn (US$9bn). Analysts are predicting deposits of Rmb100bn–Rmb120bn as at the end of 2013.
“We hope to see the renminbi market in Taiwan to follow the Hong Kong model in accommodating more products and investors,” said Cosmas Lu, CEO of Barclays Taiwan.
Now, the domestic banking units of Taiwanese banks can engage in businesses, such as deposit taking, trade finance, corporate finance, customer finance and wealth management, denominated in renminbi.
“We see promising prospects for the renminbi business in Taiwan, given Taiwan’s trade surplus with China (a source of renminbi) and Taiwan’s outward FDI (foreign direct investment) to China, among other cross-strait flows,” said Frances Cheung, a senior strategist at Credit Agricole CIB, in a research report.
HSBC, meanwhile, expects the renminbi markets in Hong Kong and Taiwan to become fungible and convergent, while it sees overall offshore renminbi liquidity receiving a boost in the long term.
That convergence is already happening – at least in the foreign-exchange arena.
The renminbi forex market remains limited in Taiwan, where it will only trade during onshore trading hours. The main offshore renminbi counter, known as CNH, trades 24 hours globally.
No renminbi swap line is yet in place between the People’s Bank of China in Beijing and the Central Bank of China in Taiwan, unlike the Rmb400bn (US$63.5bn) swap line between Hong Kong and China. Regulators on both sides of the straits, however, are heard to be discussing one.
Bao Dao bonds
On the retail side, Taiwan depositors are enthusiastic in opening renminbi accounts. However, unlike Hong Kong depositors, in the early stages of that market, those in Taiwan savers have accumulated hoards of renminbi pillows and simply handed in shoeboxes/bags of cash to open accounts, thus having little need for swaps or currency dealings. Traders were busier answering questions on the new trading currency than they were dealing with actual trading flow.
There is plenty for Taiwan to gain from clearing renminbi.
It is also expected that China will start a capital-account opening pilot project in Yiwu and Kungshan, where many Taiwanese-owned factories are located, paving the way slightly for offshore renminbi to flow back to the PRC from Taiwan.
Market players are also pinning their hopes on new foreign investment quotas to be specially granted to Taiwan, which will boost the two-way flow of renminbi across the straits.
The arrival of the renminbi has already had an impact on Taiwan’s capital markets. In February, the island welcomed its first renminbi denominated bond, dubbed Bao Dao bonds after the Chinese for Treasure Island, a popular term for Taiwan.
Chinatrust Commercial Bank priced on February 22 three-year Bao Dao of Rmb1bn (US$169m) at 2.9% after a strong response from local banks, but no offshore investors.
Then came Far Eastern New Century (Rmb500m) and TECO Electric and Machinery (Rmb300m) with Taiwan’s first two renminbi-denominated bonds from corporate issuers.
Chang Hwa Bank followed the pair in pricing a three-year debut Bao Dao bond of Rmb1bn off a Rmb3bn quota at 2.9%. The bond will settle on Tuesday, May 28.
There is a strong incentive for banks to issue Bao Dao bonds for their own funding purposes, as they can provide loans from the proceeds at much higher rates.
Deutsche Bank has received approval to issue Bao Dao bonds, although it has yet to price its deal because of pricing and swap issues. Earlier this year, conglomerate Uni-President Group, paper mill Yuen Foong Yu Paper Manufacturing and Chailease Finance also indicated intentions to issue Bao Dao bonds. BNP Paribas, Mega International Bank and Bank Sinopac are also heard to be planning similar fundraising exercises.
Taiwanese regulators expect to see 10 Bao Dao deals completed by the end of this year.
Meanwhile, the regulators are looking to allow PRC entities to issue corporate Bao Dao bonds in Taiwan.
As an instrument that international investors have widely accepted, Dim Sum bonds typically come in a Reg S format with English documentation and a standard bookbuilding process. The involvement of lawyers and investment banks is costly for Taiwanese domestic issuers, which maintain their own documents in Chinese.
While the Dim Sum market may offer other benefits, such as a deeper investor base, Taiwanese issuers are likely to prefer the low transaction costs related to issuing Bao Dao bonds, especially for relatively small-sized financings.
However, withholding tax of up to 17% is still a major hurdle, preventing overseas investors from participating in Taiwan’s renminbi bond market. While the outlook for the newest overseas renminbi capital market is bright, it will have to make do without international investors.
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