Cagamas Bhd. raised 1.5 billion yuan ($244 million) earlier this month in Malaysia’s inaugural offer of Tiger Emas bonds, the first issue in the Chinese currency to be cleared locally. The new securities join Lion City debentures in Singapore and Formosa bonds in Taiwan, which started last year and together comprise about 5 percent of a market that’s dominated by Hong Kong’s Dim Sum notes, Bloomberg data show.
Singapore’s position as a regional private banking hub, and Malaysia’s stronghold as an Islamic finance center will bring new investors into the offshore yuan bond market. Hong Kong’s advantage lies in its head start in opening up trade and investment in the currency. Yuan deposits in the city are approaching the 1 trillion yuan mark, versus some 254 billion yuan in Singapore as of June.
Dim Sum Sales
Banks in Hong Kong handled about 83 percent of China’s commerce with the world settled in yuan last year, according to a Hong Kong Monetary Authority report published in May. As the world’s largest exporter, the usage of China’s currency in global trade rose to 1.62 trillion yuan last quarter from close to zero in 2010.
With free access to China’s capital markets curbed, offshore yuan centers provide options for investors to park their yuan assets. About 343 billion yuan in offshore yuan bonds has been sold this year, almost ten times the amount for the whole of 2010, according to data compiled by Bloomberg.
Yields on such notes issued by corporates averaged 4.61 percent June 19, after touching a more than six-month high in March of 4.97 percent, Bank of America Merrill Lynch’s Dim Sum Corporate Index shows.
When looking at where offshore yuan notes are issued, what matters is whether there is a withholding tax, what laws govern the bonds and whether the custodian bank can support trade settlements in local clearinghouses, according to Invesco Ltd.
“I don’t really like the label ‘Dim Sum bonds’ because this connotes a link to Hong Kong,” said Ken Hu, the Asia-Pacific chief investment officer of fixed income at Invesco, which had $812 billion under management globally at the end of August. “It’s a bit ridiculous, soon we may have fish and chip bonds, pizza or hamburger bonds.”
Singapore is emerging as Asean’s hub for offshore renminbi, receiving more than half of China’s foreign direct investment into the region up until 2010, an HSBC Holdings Plc report said last month. China shares a border with several Asean economies including Vietnam.
About 12 percent of Asean’s exports went to China in 2013, up from 6.5 percent a decade prior, according to the report. China accounted for more than 16 percent of the region’s imports last year versus less than 8.5 percent in 2003.
HSBC and Standard Chartered Plc sold the first Lion City bonds in May 2013. Oil and gas engineering group Swiber Holdings Ltd. raised 450 million yuan from the first Lion City note from a Singapore company earlier this month. The three-year 7.75 percent debentures were yielding 8.52 percent on Sept. 22, Bloomberg-compiled prices show.
“Since we started promoting offshore yuan bonds out of Singapore, we’ve seen additional interest and queries from Singapore-based investors and issuers,” said Clifford Lee, the head of fixed income at DBS Group Holdings Ltd., the top-ranked arranger of Singapore dollar bonds since 2009. “Singapore is the first offshore clearing center truly outside of China. It’s a welcome step in the development of the renminbi.”
Yet it’s still unclear what exactly denotes a Lion City bond. Unlike Swiber and notes sold by Hainan Airlines Co., which were cleared and listed in Singapore, the 3 billion yuan of securities sold by Bank of China Ltd.’s Singapore unit are listed on the Singapore Exchange, but not cleared in the city.
Cagamas Chief Executive Chung Chee Leong disagrees various brandings will lead to more bond sales. “I don’t think just because of a name, you’ll have more issuance of this versus another,” he said in an interview in Kuala Lumpur on Sept. 17. “It will really depend on the needs of the individual issuer.”
All foreign currencies out of Malaysia are referred to as Emas, meaning gold in English. Tiger was added because the animal is part of Malaysia’s national coat of arms, Chung said.
“The renminbi market will be an important one for Malaysia’s Islamic finance industry,” Steve Wang, the head of fixed-income research in Hong Kong at BOCI Securities Ltd., a unit of China’s fourth-largest bank, said in a Sept. 22 phone interview. It will “sharpen their lead in Islamic finance if they can capture the opportunities in the offshore yuan market.”
So far only Khazanah Nasional Bhd., Malaysia’s sovereign wealth fund, has sold a Dim Sum bond that complies with Islamic law. Those 500 million yuan of 2.9 percent three-year notes due next month are yielding 4.06 percent, Royal Bank of Scotland Group Plc prices show, compared with 3.24 percent at the start of the year.
Ten-year Chinese government bond yields have fallen 52 basis points since Dec. 31 to 4.03 percent on Sept. 19. The yuan is Asia’s worst performing currency this year outside of the yen, depreciating 1.4 percent against the dollar. This quarter-to-date it’s the best performing, up 1 percent.
Outside of Singapore and Malaysia, South Korea has also struck a deal with China, the two nations agreeing on July 3 to make their currencies mutually exchangeable in Seoul. China is South Korea’s biggest export partner and with only 0.3 percent of trade payments settled in the Chinese currency, the won-yuan market has the potential to grow rapidly, Goldman Sachs Group Inc. said in a report later that month.
In Europe too, countries are positioning themselves. The PBOC authorized Bank of China as a yuan clearing bank in Paris earlier this month while U.K. Chancellor of the Exchequer George Osbornesaid at a press conference in London on Sept. 12 the country plans to be the first government outside China to issue bonds in yuan, after talks with Vice Premier Ma Kai.
“Each city wants to exert themselves as a renminbi center but over time, these different names and categories will disappear,” said Raymond Gui, a Hong Kong-based senior portfolio manager at Income Partners Asset Management Ltd., which managed $1.3 billion as of August. “The greater trend is about the global usage of the renminbi.”
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