EU renminbi bond first highlights hub competition

Author: Ashley Lee | Published: 22 May 2014
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Bank of China’s (BOC) Luxembourg-listed renminbi bond – the first in the country by a Chinese issuer – has further spurred competition to be the currency’s European hub.

Its Luxembourg branch launched the deal on May 14, selling RMB 1.5 billion ($240.6 million) of three-year bonds at a coupon of 3.5% under its $10 billion medium-term note programme. The first also introduced a new name for Luxembourg-listed renminbi bonds by Chinese issuers – Schengen bonds.

Six European financial centres – London, Paris, Frankfurt, Moscow, Zurich and Luxembourg – are competing to become the continent’s offshore renminbi hub. Only five Asian cities are competing for the same role.

"BOC is issuing around the world to make a point"

Chinese banks are encouraging the rivalry by selling bonds in the competing markets; a development that also furthers the internationalisation of the offshore renminbi.

"BOC is issuing around the world to make a point," said Linklaters London partner Andrew Carmichael, noting that the bank listed bonds from its London branch in January, its Sydney branch in March and its Luxembourg branch in May.

BOC’s bonds will be settled through its Hong Kong account although they were listed in Luxembourg and raise funds through for BOC’s Luxembourg branch. Carmichael said this illustrates that both London and Luxembourg have a way to go before they match Hong Kong.

Completing payment in Hong Kong also bypasses fungibility issues between offshore renminbi cleared in Hong Kong (CNH) and Singapore (CNS). "At the moment there’s no easy way to convert CNS to CNH, so BOC’s London and Luxembourg bonds both kept payments in the Hong Kong renminbi settlement system," he added.

Key takeaways

  • Bank of China has issued the first bond from a Chinese issuer to be listed in the eurozone;
  • Luxembourg hopes that the first Schengen bond will prompt more bond listings from Chinese SOEs;
  • But the competition between European financial centres to dominate renminbi trade within the region

Luxembourg’s Schengen future

Linklaters’ Luxembourg-based partner Nicki Kayser said that there are already approximately 50 renminbi bonds listed in Luxembourg, one of the largest debt-listing venues in the world. "It makes sense for more renminbi bonds to list here to attract European issuers and investors," he added.

The non-Chinese issued dim sum bonds, such as those by multinationals Caterpillar, Volkswagen and BP will list their bonds in Hong Kong when advised by their lead manager, added Carmichael. But when they’re doing a relatively standard transaction off a medium term note (MTN) programme, they’ll list bonds in their usual venues – usually Luxembourg.

Attracting Chinese issuers to Luxembourg will be more difficult. Many Chinese state-owned enterprises have equity listed in Hong Kong and list their debt there as well; it’s a natural home for these companies.

"They need to know that there are commercial reasons for listing elsewhere, but if their lead managers advise that it will benefit the deal, they will do it," said Carmichael.

But there are options elsewhere. Agricultural Bank of China’s Hong Kong branch sold RMB 1.2 billion in Frankfurt-listed bonds on May 8, marking the first-ever CNH bonds from a Chinese borrower to list in Frankfurt. China Construction Bank’s RMB 1.5 billion bond , launched on May 19, was the first-ever non-German law bond to be cleared in Frankfurt.

European RMB hubs

Alongside bond offerings from big four state-owned banks’ bond issuances there has been a flurry of activity in European renminbi hubs. Most notably Frankfurt and London recently signed yuan-clearing agreements with the People’s Bank of China (PBoC).

But it’s unclear how all of the European renminbi hubs will work together. An April survey of IFLR readers revealed that 40% believed London has the greatest potential as an offshore renminbi hub – before even Singapore. Luxembourg only received 6.6% of reader votes.

A holistic European approach would be sensible because each city has its own market function: Luxembourg is the second-largest funds centre in the world, London is the global centre for foreign exchange and Frankfurt is a hub for trade finance.

"The different financial centres will play to their strengths in the development of renminbi hubs," Carmichael predicted.

The competition may hamper cooperation though. A report released yesterday by Aite Group and Deutsche Börse’s Clearstream included responses from 24 firms in the Chinese market; more than half believed that Europe as a whole would be a centre for offshore renminbi activity.

But, a respondent added, collaboration between the centres was unlikely in the short term because they appear to be competing in the race to act as a hub for clearing the currency.

Related links

Offshore renminbi clearing hubs could add transaction risk

POLL: the next offshore RMB hub

Luxembourg’s CSSF: Europe’s next RMB hub