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PRC Government Encourages Growing Offshore RMB Bond Market

September 13, 2011

O’Melveny has prepared a Primer on Offshore RMB Denominated Bonds. 
View it here. 

While other global debt and equity markets appear to be frozen at the moment or in one kind of crisis or another, the offshore RMB bond market in Hong Kong continues to experience strong growth with recent issuances by foreign multinational corporations, PRC companies including SOEs and the PRC government. RMB denominated bonds issued outside of China (also referred to as “CNH bonds” or “Dim Sum Bonds”) amounted to approximately RMB40 billion in 2010 and approximately RMB69.4 billion in the first six months of 2011. Outstanding volume reached approximately RMB135 billion in July 2011 and is expected to reach the RMB200 billion mark by the end of 2011, according to a recent IFR Asia report. Prospects for the market were enhanced further during the recent visit to Hong Kong by Chinese Vice Premier Li Keqiang and People’s Bank of China Governor Zhou Xiaochuan who, in statements, gave encouragement to PRC companies to issue offshore RMB bonds and indicated a smoother process can be expected for the repatriation of the RMB funds raised offshore back into China.

The market for offshore RMB bonds issued in Hong Kong began in 2007 with issuances mainly by PRC commercial banks and quasi-government policy banks. The market grew slowly but steadily during its early years under PRC government policy which limited the types of issuers for which SAFE and PBOC approvals would be given to remit offshore proceeds back into the PRC and to later make payments of principal and interest in RMB to offshore holders. However, since September 2010’s RMB200 million bond offering by McDonalds Corporation (the market’s first foreign MNC issuer) the market has grown significantly in line with the increase in RMB deposits held by institutions and individuals in Hong Kong bank accounts. RMB deposits in Hong Kong have grown rapidly in the past year and a half from a mere RMB64 billion at the beginning of January 2010 to approximately RMB572 billion by the end of July 2011. During the past year, issuers of RMB bonds have ranged from sovereign (the PRC government), supra-national (Asia Development Bank), foreign investment grade MNCs (Caterpillar, Volkswagen, CJ Corp, Orix, Tesco), PRC SOE’s (China Eastern Airlines) to high yield issuers with significant PRC operations and assets (Powerlong Real Estate, Guangzhou R&F Properties, China Shanshui Cement).

As the market has grown with issuers of varying types and credit worthiness, investors have also become more selective and recently seem to be demanding higher yields from non-investment grade issuers. Conversely, stronger credits such as Caterpillar, McDonalds and more recently Tesco, were able to achieve favorable pricing on their recent issues.

Activity in the offshore RMB bonds market is expected to further escalate in light of the continued growth of the Chinese economy and support from the PRC government. China’s 12th Five-Year Plan supports development of Hong Kong as an offshore RMB business centre. Furthermore, Vice-Premier Li announced during his visit to Hong Kong in August 2011 (mentioned above) that China will allow foreign direct investment (“FDI”) on the mainland using offshore RMB instead of the current policy of only allowing US dollars or other foreign currencies. Companies which were previously reluctant to issue RMB denominated bonds because of uncertainly in repatriation of the RMB raised offshore back to the PRC mainland now have encouragement to issue. Foreign companies with investments in China are expected to take advantage of this new policy as it could reduce currency risks if they were able to raise funding in RMB and invest in their PRC projects in RMB, rather in US dollars or other foreign currency, with the prospect of first time issuers from other overseas jurisdictions joining the American, Japanese, Korean, UK, German, Russian and other issuers already in the market.

O’Melveny has prepared a Primer on Offshore RMB Denominated Bonds. 
View it here.