Offshore yuan bond issuance in 2011 is likely to be many times that of 2010.
The Dim Sum market doesn’t show any sign of cooling. So far in 2011, there have been more deals than in all of 2010. Recently, global consumer products company Unilever, looking to finance growth in the country, issued a 3-year yuan bond in Hong Kong paying a record low 1.15 percent.
And recent developments will likely spur companies to finance operations using yuan bonds, or Dim Sum bonds, as they are known. For one, Fitch in April lowered China’s yuan debt to negative from stable and the People’s Bank of China is now tightening banking policy, attempting to slow bank lending. According to Fitch, loans to companies and households in China rose to about 140 percent of gross domestic product in 2010, up from 111 percent in 2008. Secondly, Fitch cited concerns about rising real estate valuations and inflation.
China has been actively promoting RMB-denominated assets reportedly in response to the US Federal Reserve’s second round quantitative easing, so called QE2 (see related story here). The fact is China does not want to sit idly by and watch the value of its dollar reserves eroded without responding and boosting the offshore RMB is one way to do this. It also allows for greater convertibility for onshore use.
According to a note to investors from Brown Brothers Harriman, the Dim Sum market may be emblematic of a transition phase for China. Currently Dim Sum market is restricted to Hong Kong, although if there is continued success of the market, China may gradually bring it to the mainland. Right now, onshore market “is highly restricted and non-Chinese borrowers are largely prohibited from issuing bonds on the mainland.” Nonetheless, the market itself remains small, Brown Brothers said, with the largest underwriter expecting issuance in 2011 of $18-$22 bn. Nor is the market very deep, with most issuance for three years or less.
For treasurers, the Dim Sum market and the Fitch downgrade bears watching. According to Fitch, there is a “high likelihood of a significant deterioration” in banks’ asset quality within three years. Bad loans could rise to 15 percent to 30 percent of the total. Therefore, any relationships with local China banks could get a little complicated. It could also complicate US MNC plans for growth in the country if there is some sort of widespread banking crisis.