Curves in all the wrong places

It is an inverted curve that is acting as a brake on Dim Sum issuance at the moment. Should that change, more SSA issuers are expected.

In the fourth quarter of last year the offshore renminbi market for SSAs sprang into life. In quick succession there were issues from the UK, British Columbia and New South Wales Treasury Corp. Before the end of the year they were joined by France’s Caisse d’Amortissement de la Dette Sociale (Cades).

It began to look as though an issuance corner had been turned. Was Dim Sum issuance about to move out of the shadows and start to take centre stage for SSAs? Inevitably, the answer is not quite as simple as either yes or no.

There is no doubt that thanks to encouragement from the authorities, the volume of Dim Sum issuance in general has grown. Volumes for 2014 surpassed 2013 at the half-year point and most expect volumes for 2015 to remain at this high level. HSBC, for example, expects gross issuance of renminbi bonds and certificates of deposits to be somewhere between Rmb490bn (US$78.7bn) and Rmb520bn in 2015. That figure is only slightly down from an estimated Rmb530bn in 2014.

A decline in issuance has little to do with a lack of appetite, rather it has to do with refinancing needs. The refinancing demand for 2015 is around Rmb35bn less than that of 2014. If net supply is looked at on its own, then the volume figures are likely to be roughly the same.

First out of the sovereign and semi-sovereign block in mid-October was the UK, which sold a Rmb3bn (US$490m) three-year Dim Sum issue via Bank of China, HSBC and Standard Chartered, the largest renminbi bond offering to-date from any non-Chinese issuer.

“We need to export to fast-growing economies such as China, and attract more investment to our shores,” said British chancellor George Osborne. “To do that, we need to make sure China’s currency is used and traded here, as that will be not only good for China, but good for British jobs and investment, too.”

Certainly the appetite was there. Books were almost twice covered with demand of about Rmb5.8bn from 85 accounts before the issue was priced to yield 2.70%, the tight end of final guidance of 2.75% plus/minus 5bp.

It was a significant step in the evolution of the market and was followed at the end of the month by British Columbia. The Canadian semi-sovereign sold Rmb3bn of two-year SEC-registered notes at 2.85%, the top end of the final indicative range of 2.80%–2.85%.

The province was clear about its reasons for coming to market. “It sends a powerful message about our seriousness of intent in both being present in that debt market and also facilitating the internationalisation of the renminbi,” said British Columbian finance minister Michael de Jong at the time.

But although the Triple A rated province’s commitment to the currency is not in doubt, bankers in Hong Kong emphasise that another deal from them is unlikely this year.

“The deal refinanced British Columbia’s first bond [Rmb2.5bn one-year 2.25%] and as it was a two-year refinancing they are not going to come to market in 2015,” said one local currency banker in Hong Kong.

In mid-November, New South Wales Treasury Corp was the last semi-sovereign to print. The first Dim Sum bond issue from an Australian state was led by ANZ and Bank of China. Like the British Columbia issue, the Rmb1bn (US$163.5m) of one-year 2.75% paper was intended to send a signal.

“TCorp has seen strong levels of investment from the Asian region in our Australian dollar bonds and issuance in renminbi bonds will provide an opportunity to expand and diversify this investor base. The closer financial and trading ties between Australia and China will see opportunities grow significantly in the years ahead,” said TCorp chief executive Steve Knight.

Just before Christmas, France’s Cades indicated that it too intended to sell a renminbi-denominated bond issue.

“Cades’ mission is to manage and amortise French social debt using a diversified range of bonds issued in euros and in various other currencies to meet international investors’ needs,” said Cades chairman Patrice Ract Madoux.

A solid borrower, Cades priced its deal at the end of January – a Rmb3bn two-year Dim Sum bond issue to yield 3.8% through Bank of China, BNP Paribas, Credit Agricole, HSBC and Societe Generale.

International reach

All of these deals have certainly added to the internationalisation of the renminbi. But it is important not to get too carried away. Certainly, internationalisation was helped last year with an increase in the number of offshore renminbi centres. With the addition of Seoul, London, Frankfurt, Paris, Doha, Toronto and Sydney to the group, there are now 10 centres that extend right around the globe. Others are likely to join the group in the not too distant future.

Last year, for example, Swiss National Bank and Bank of China agreed to establish a bilateral currency swap line – a deal that was finally inked at the end of January this year.

The motivation is clear. “The high level of interaction between China’s and Germany’s real economies highlights the necessity for a more active renminbi trade, perhaps even using Germany as a hub,” said Bundesbank board member Joachim Nagel at the time.

But while this is good news, bankers are sceptical about the actual value of an offshore renminbi centre.

“There is absolutely no correlation between clearing and issuing,” said one banker. “Having a renminbi centre does make a political statement and it certainly indicates an aspirational trade partner, but having a clearing house in Doha or Luxembourg does not fundamentally change the ability to clear renminbi,” said one Hong Kong DCM head.

To get a sense of future SSA issuance, it is important to understand the different types of borrowers. There are those with lending programmes such as the IFC and the Asian Development Bank. Related to those are the strategic borrowers such as the World Bank and Germany’s KfW. And then there are those, such as Britain or British Columbia, that are using Dim Sum issuance to make a political statement.

Of course, the categories are not remotely set in stone. Many note, for example, the change in tone from the UK with regards to Dim Sum issues. After the announcement of the first renminbi deal, it was made clear that this was a single one-off transaction. In subsequent statements the tone from the British government has softened to “probably the first”.

Questions of motivation aside, there are two issues that are going to hamper further SSA renminbi issuance this year. One concern is longer term, the other is immediate.

The broad issue at the moment is the general weakening of the renminbi against other currencies. The Chinese currency lost more than 2.4% of its value in 2014, compared with an appreciation of 2.8% in 2013. Weak economic indicators have added to generally bearish sentiment towards the currency and there appears little on the horizon to give optimism. With volatility on the increase, the default position of borrowers has been to park money in a G3 currency until calm is restored.

More immediately, what has given issuers pause for thought at the moment is the shape of the renminbi curve.

“The barrier to issuance at the moment is the inversion of the front end of the curve,” said Chris Jones, global head of local currency at HSBC in London. He pointed out that at its peak, the three-month swap rate was 200bp higher than the three-year rate. It has flattened somewhat and in mid-January was down to around 85bp.

Immediate currency concerns aside, interest in renminbi issuance remains, if anything, even stronger than before. Bankers talk about their surprise both at the number of issuers and the variety of issuers that are considering a Dim Sum deal.

“Many of them would not have considered such a move 12 months ago,” said one local currency banker.

With a growing investor base, and European asset managers who now have mandates to look at renminbi, the expectations are that should there be a stabilisation in the currency, and the pipeline of SSA Dim Sum issuers will continue to grow.