FREE: First London RMB bond explained

Author: Gemma Varriale | Published: 26 Apr 2012
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

HSBC has announced its plan to launch the first renminbi (RMB) denominated bond outside of Chinese territories. The benchmark-setting issue will help establish London’s status as a global hub for RMB business.

Clifford Chance has confirmed to IFLR that it is legal counsel to HSBC as issuer on the three-year, unsecured bond.

Set to be listed on the London Stock Exchange and distributed within Europe and Asia, the bond was priced with a yield of 3% and the transaction closed with a book size more than twice the issue size. According to a HSBC statement released last week, the transaction saw very strong demand from both European and Asian investors, with over half of the allocation going into European accounts. It is expected to raise over Rmb2 billion (£197 million).

Allen & Overy’s capital markets partner Matthew Hartley said it was encouraging that the issue attracted strong demand from a European investor audience.

But RMB liquidity, or the lack thereof, will pose a major challenge for future development of the market. The currency is still not freely convertible.

“This transaction has demonstrated that there is sufficient liquidity in both Europe and Asia to cover quite a lot of funding at the moment,” he said. “But it is unclear how many more of these issues the market will support.”

“Until the regulations are further relaxed, a limited pool of funding will be available,” he said.

Hartley compared the development of the RMB market with that of the euromarket 50 years ago, when it started to tap into US dollars held offshore.

“It’s not inconceivable that, if there is further liberalisation, RMB in the future could be a currency of choice for euromarket funding, alongside dollars and euros,” said Hartley.

The bond issuance follows the 2011 agreement between British and Chinese governments to develop RMB trading in London. And coincides with the announcement this month by China’s central bank, the People’s Bank of China’s (PBOC)of its intention to develop a direct international payment system for RMB, the China International Payment System (Cips).This will open its cross-border RMB payments system to banks around the world and operate according to the world’s major time zones.

Linklaters’ Nigel Pridmore said Cips would effectively take over the Hong Kong infrastructure currently used to trade RMB on- and off shore.“The great thing is that London is able to plug straight into this,” he said.

A new initiative

The deal announcement also coincided with City of London Corporation’s April 18 launch of a working group aimed at making the city the dominant offshore hub for RMB business. The initiative brings together representatives from five major banks and is supported by HM Treasury, the Bank of England and the Financial Services Authority.

In a speech to commemorate the launch, UK Chancellor of the Exchequer George Osborne welcomed the move. Praising London for its long history of financial inventiveness, he said RMB trading was the next step along a 400 year road.

“We are not prepared to let anyone steal a march on us in terms of new products and new markets,” he said

By the end of 2011, the volume of RMB deposits in London totalled Rmb109 billion (£11 billion). Rmb35 billion of this is customer deposits. The annual trading volume in offshore RMB bonds is now at Rmb28 billion.

HSBC expects the international RMB bond market to reach Rmb1 trillion within three years, as demand for RMB-denominated assets grows.

As noted by the BBC, the bank’s move to raise the money for itself rather than for a client could signal its enthusiasm to be part of the liberalisation of the Chinese market. Inter-bank borrowing would have cost it much less.

HSBC currency strategist David Bloom told the BBC: "HSBC want it and they want it bad. China is opening financial services to the world and the question is do you want to be part of it or not? And the answer is yes we do".

Click here to read about PBOC’s decision to widen the RMB trading band against the US dollar.