IFR: John, when you came to market with your two deals, were they individually rated?
John Ho: Well, ratings weren’t really the point. The first one was done by HSBC and, really, I think the terms were already set before we asked the rating agency to rate it. HSBC felt confident it could distribute that amount of money. The key really is the supply and demand. I mean, for people like Angus as an investor, they see it as low risk; they see it as appreciation on the renminbi. From our side, the way I look at it is the tenor, the cost, the size. If these three things work, then I will go for renminbi. We can’t just do it because it’s renminbi. It has to compete with US dollars, Hong Kong dollars, Aussie dollars, Singapore dollars. I think it’s natural that people will only go back to renminbi if it competes with these other currencies.
“The terms were already set before we asked the rating agency to rate it.”
Philip Li: Actually, I don’t quite agree that ratings aren’t that important. It’s a regulatory issue. In the domestic market in China, any issue, no matter short term or long term, has to be rated, otherwise you’re not allowed to issue any bonds, but, in an international financial centre like Hong Kong, Singapore, London, it’s a free market that purely depends on supply and demand. So, if as an issuer, you think you can find enough demand for your bonds at your target cost of funds, then, of course, you can rely on an intermediary to distribute them. However, especially in a small market like Dim Sum bonds, it is a developing currency and too small for many investors.
IFR: Do you think the Chinese Government is actually happy that the pace of Dim Sum issuance has cooled down a bit?
Philip Li: Well, on the surface, they should say they are happy, because they need to make it rational. From a very high-level point of view, the Chinese Government can speak in another voice in the international market. It’s not just a monetary issue, it’s a political thing.
IFR: We heard from John Ho earlier about the two deals of Towngas. Given that the market has moved on since then, would those deals be done any differently now?
Gina Tang: Certainly, the market is more mature. Deals are being done in a more similar fashion to US dollars – in terms of bookbuilding, price discovery and investor marketing. So, that’s a good sign of maturity at this stage of consolidation. The renminbi internationalisation is a much bigger agenda for the Chinese Government. This market is going to grow; it’s China’s ambition to use its currency much more internationally.
IFR: So, early expectations were, perhaps, a bit too high? What we’re looking at now seems to be a bit more sustainable.
Gina Tang: Year to date, we stand at about Rmb130bn (US$20bn). That’s not bad compared to the Asia G3 volume of about US$100bn, just in the space of two to three years. Although it started in 2007, things didn’t really take off until last year.
Francis Ho: CLP, typically, is an issuer, but, sometimes, we look into renminbi investment opportunities – not only for the company, but also for our pension fund managers. The purpose is to diversify and let them decide what they would like to put in their asset portfolios. From our perspective, as John and Philip remarked earlier, the renminbi market is still at an early stage of development. It’s very fragmented.
From an investor perspective, we looked at how we can approve renminbi-denominated assets for our pension fund managers. We believed, at the time, there were too many papers in the market that didn’t carry the right rating to sit in our portfolio. So, we deferred that decision until later. After that, we have seen the market come back with a better grade of issuer. So, even though volumes have come down a bit, we are now more confident for our portfolio. I think that’s a very positive development. Also, the coupons have come up to more reasonable levels. So, I would say it’s a healthier, longer-term sustainable market.
IFR: Would you ever pay more to issue Dim Sum bonds for diversification purposes?
Francis Ho: I think the challenge for most of the blue-chip companies in Hong Kong is, first, do they need renminbi? Second, does the cost come up with reasonable terms? Probably, the reason why not many big Hong Kong companies have come to the market is that they have got more cost-effective funding from other channels. At CLP Power, we have an MTN programme. So far, we have issued dollar bonds, Hong Kong dollar, and we also have Australian dollar and Japanese yen bonds. We often swap back to our functional currency. We can’t ignore renminbi, but, for the time being, we are following the market.
“The reason why not many big Hong Kong companies have come to the market is that they have got more cost-effective funding from other channels.”
If we look at other issuers, Korea Development Bank was able to issue two tranches of Dim Sum bonds of a total Rmb1.6bn and swap back to US dollars, reportedly at more cost-effective funding than in dollars. That is a very important development because it will further diversify what investment-grade companies can do going forward. Perhaps, it has subsided a little, but it’s more because of macroeconomic concerns over China. That kind of two-way view means we can look for swap opportunities in the market. Otherwise, 18 months ago, there was only one big attraction for issuers – borrow in Hong Kong at low coupon and send it back to the mainland.
Philip Li: CLP is a very big blue-chip company that would have no problem raising funds in whatever currency. The point, for a corporation, is whether or not you need renminbi funding, rather than just looking to swap into US dollar to save cost. If the border between China and the outside world is liberalised a bit more, I can see a big influx of renminbi issues from Chinese corporations in Hong Kong. Looking at the domestic market in China, the majority of corporations need money. So, if we allow them to come out to Hong Kong it’s a bridge of no return, and you guys will be very busy. At this stage, it’s a regulatory issue.
John Ho: What you say is correct, but I don’t really see any likelihood of China easing its foreign exchange controls in the near term. Even if it happens, I don’t think it will help the Chinese corporations anymore, because the arbitrage will come in. At the moment, if you borrow money in China, you have to pay more, but, if you ease up this border, the cost of funding will come to equilibrium.
Philip Li: If you look at the development of the Eurodollar market, it started because of regulations from the Federal Reserve in the 1960s. American issuers found, at the time, that the European market could help them get a lower cost of funds because of the Russian money in English banks. Once the US Government allowed them to, they rushed into the Eurodollar market. I think this will also happen in China. I agree it’s not a near-term thing. People are talking about the full convertibility of the renminbi in five to 10 years. In my view, that’s too optimistic because it will take another quarter century to materialise.
Francis Ho: If I can quote the Eurodollar situation, there was an arbitrage situation even though there was no regulatory difference. That may be because of different investor bases, different listing requirements and tax regimes. Put it this way, even if China removes all the restrictions on the renminbi, Hong Kong still has very different tax regulations and listing requirements. So, the arbitrage opportunity should still exist. There will be opportunities in the two markets to come up with innovative ideas and take the most effective terms of doing business.
Philip Li: The gap between domestic policy practices and Hong Kong is too wide. Now, the central government is developing Qianhai – a very important bridge to connect the current domestic market in China with the current international market. Charles Li, the HKEx CEO, wants to push products out very fast, but it’s difficult. That’s why Qianhai is really the hook for the Chinese Government to make the liberalisation faster. There are already more than 40 Chinese departments that have opened offices in Qianhai. So, you see, it can be very fast.
Ivan Chung: There’s certainly a gap in the disclosure and transparency, and we’ve seen some real-life examples of that. We try to explain to the bankers that we cannot always do a very quick analysis, because we’re dealing with a different kind of company. In the US dollar market, it’s mainly companies that already have international listings. Now, we have private companies coming to Hong Kong and we need to understand their disclosures. As they may not always use the big four accountants, we have to look at Chinese GAAP and regulations. It’s also for the investors – it may take some more time. The evolution is more like the A and H shares. Now, it’s pretty much converged, but it’s taken 10 years. We also need to look at the many multinationals in this market, and I think the Chinese Government is happy to see that. The use of renminbi in offshore investments may be what makes this market more interesting, rather than a part of the Chinese domestic market.
IFR: While we’re talking about policy, it’s not just Hong Kong, is it? Is that an encouraging development, or is it just the currency appreciation story all over again?
Michael Lam: I think, if you have an MNC like Deutsche Bank in CNH, you will be looking at dedicated local currency funds from the likes of Pictet. They will be interested, but the same issues are still present. It doesn’t have the liquidity that you can get in euros or dollars. If you look at the MNCs that have come, most have come at a premium to where they could fund in dollars. These European investors would happily invest because you can earn a premium. Indian or Korean companies looking for more attractive costs, through swapping back to dollars, don’t represent all of the foreign issuers in this market.
“Full convertibility in five to 10 years is too optimistic.It will take another quarter century.”
IFR: How important is the investor base outside Hong Kong to getting deals done now? Is that a growing area?
Gina Tang: HSBC issued the first London-listed CNH bond and that one had good London participation, but it was the first issue, and we haven’t seen any follow-on yet. The Chinese Government is also focused on getting the currency to develop further with London and Taiwan as well. So, we’ll have various patches, with Hong Kong as the offshore renminbi centre.
IFR: Do you see any threat to Hong Kong as that centre?
Gina Tang: I think Hong Kong should continue to find itself at the centre. London and others will help grow the overall pie bigger, rather than take it away. I think China still wants to use Hong Kong as the centre, but also wants to drive liquidity in the other centres.
Ivan Chung: It’s important. If the renminbi becomes a global currency, you need trading outside the Asian time zone. So, in that sense, London is helpful. As Taiwan has very strong trade and investment links with China, it looks like developments there will be more domestic focussed. Hong Kong can be more of a gateway to the international markets, and will get more liquidity.
