Market support for Hong Kong's latest renminbi-denominated bond, issued on 6 July by US-based construction equipment and engine manufacturer Caterpillar, bodes well for plans to widen the range of renminbi-denominated (CNH) offerings in the special administrative region.
Caterpillar’s two-year bond was priced at 1.35% and raised CNH2.3 billion for the firm.
“This bond came at a good level in terms of CNH value, and if you swap this back into dollars it gives you a nice return for an international issuer,” said one head of bond trading at a global broker, towards the end of the trading day.
“I would assume a lot of international accounts came into this.”
According to the Hong Kong Monetary Authority (HKMA), 2011 CNH bond issuance had already reached 76% of last year's total by the end of May 2011, with 28 issuers raising CNH28 billion in Hong Kong. In 2010, 16 yuan bond issuers raised CNH 36 billion. The Asian Development Bank's CNH1.2 billion deal issued last October was the first publicly-listed bond to be traded and settled in renminbi, and four other organisations have since listed their CNH debt with the Hong Kong Exchange and Clearing (HKEx).
Having already facilitated a CNH-denominated IPO by the Hui Xian Real Estate Investment Trust (REIT) in April, the exchange is keen to further expand its range of renminbi products in expectation of more intense competition with mainland exchanges in the near term.
HKEx is informally consulting with market participants as it develops the infrastructure needed to support new CNH-denominated right issues and has been holding discussions on new models that would satisfy the demand for investible renminbi-based products.
According to broker Deutsche Bank, the renminbi deposit base in Hong Kong as of May 2011 stood at CNH550 billion (US$85 billion).
“The deposit base, earning a low interest rate, is looking for assets to invest in,” says Vishal Goenka, head of local currency credit trading for Asia, at Deutsche Bank. “That’s why we have seen a raft of CNH-denominated funds launched by asset managers in Hong Kong and Singapore. The value of bonds issued in CNH as of December were about CNH60 billion (US$9.27 billion) and have now grown to CNH150 billion (US$23.1 billion).”
International investors, such as global asset managers, have also moved into the market he says.
“They are looking for a higher return through the perceived FX appreciation. And for emerging markets in Asia, this is the only free capital flow market – markets in India or China are controlled and there are withholding tax issues,” explained Goenka. “We are bullish and expect the bond market to grow to RMB250 billion by the end of the year.”
New IPOs
With the size of the deposit base outstripping the value of investible assets by some margin, the sell-side are keen to offer products that promise better returns than savings accounts. Sources at HKEx suggest that as well as RMB-denominated IPOs there could also be dual-currency listings with a portion in Hong Kong dollars and the rest in renminbi. Some existing issuers may also issue in CNH in future.
The two IPO schemes that HKEx is currently considering, the ”single tranche, single counter' and ”dual tranche, dual counter' models will both support investment from firms that have limited access to CNH.
Shares issued under the single tranche offer will make use of a Trade Support Facility (TSF), due to become operational in the second half of the year. The TSF will provide firms with access to renminbi for the purpose of investment on an ”HKD in, HKD out' model, meaning that HKD can be put into support investment in CNH-denominated equities via the TSF, but the conversion is reversed upon sale of the assets, and all returns will also be provided in HKD.
The ”dual tranche' model will work in a similar manner to a dual-IPO structure, with the tranches essentially working as parallel IPOs, with the offer price of the two tranches being equal, subject to currency conversion, and with the issuer able to reallocate shares between the two tranches dependent upon demand. The exchange supports convertibility between the two tranches of shares but as the market is at an early stage the first few IPOs are expected to be non-convertible for a short period.
Trading in shares of both tranches would be cleared and settled separately under HKEx's Central Clearing and Settlement System (CCASS).
Market support
The ability to support a range of equity models on HKEx offers real potential for buy-side firms seeking to get exposure to renminbi assets said George Molina, director of Asian trading at emerging market specialist buy-side firm Franklin Templeton.
“From a trading view we believe this is positive for the market and Hong Kong as demand for RMB product has been overwhelming as of late and gives investors access to new products in the market place with exposure to the RMB,” he said.
“As the [CNH] market grows you can expect to see equity issuance and CNH loans coming along, so the asset classes will be expanded,” said Goenka. “In the future we will see more and more CNH issuers, across all assets, that will be non-Chinese. Not only western European and American but from high-yielding countries as well, such as Indonesia, India or Brazil.”