The helicopter swooped over Hong Kong’s Victoria Harbor trailing a huge red-and-white banner: RMB SOVEREIGN BONDS. There were billboards on buses and banks and at the entrance to the cross-harbor tunnel.
The city’s biggest sale of bonds in China’s currency, the renminbi, may not have blown away the man and woman on the street. Yet the burst of advertising in August did signal just how important the event was to the Beijing government and to the bankers and traders who feed off the Chinese economy, Bloomberg Markets magazine reports in its December issue.
Nicknamed Dim Sum bonds after Hong Kong’s favorite dining pastime, the securities are the hottest financial innovation in town.
“It’s probably the fastest-growing market I’ve seen in my career,” says Tee Choon Hong, a 20-year banking veteran now at Standard Chartered Plc. (STAN)
Dim Sum bonds have come into their own this year.
The first-ever Dim Sum bond was sold by China Development Bank Corp. in July 2007. That maiden sale was a solid indication of China’s interest in promoting its currency in global trade and investment via yuan-denominated bonds: CDB is one of three banks in China responsible for raising funds for large infrastructure projects such as the Three Gorges Dam and Shanghai Pudong International Airport.
From then until July 2010, only Chinese and Hong Kong banks were allowed to issue bonds denominated in yuan, the basic unit of the renminbi. Now all banks can.
A Bright Spot
The surge in Hong Kong this year has been electrifying, says William Liu, a Hong Kong-based partner at Linklaters LLP, an international law firm.“The changes are so rapid that I have to amend my slides every time I give a presentation,” Liu says.
The appetite for Dim Sum debt is one of the few bright spots in the Hong Kong economy.
Gross domestic product edged up 0.1 percent in the third quarter from the previous months, compared with a 0.4 percent contraction in the second quarter, as Europe’s crisis created a drag on overseas sales.
Exports declined in September for the first time in almost two years. The Hong Kong stock market fell 21 percent during the third quarter, its worst performance in a decade.
Donald Tsang, the city’s chief executive, said on Nov. 12 that Hong Kong’s economy may face “some shocks” in the coming quarters. The government lowered its estimate for the full-year expansion to 5 percent from a range of 5 percent to 6 percent in an August estimate.
Bankers Cheered
Against this backdrop, the dim sum bond boom has cheered bankers in Hong Kong, one of two former colonies designated as special administrative regions by Beijing. (The other SAR is Macau.)“The offshore yuan business offers one of the most exciting new opportunities for Hong Kong,” says Gina Tang, head of debt capital markets for Hong Kong and China at HSBC Holdings Plc. (5) “Banks are actively recruiting to build up their teams.”
Sales of Dim Sum bonds rose from the third quarter of 2010 onward following a decision by the Hong Kong Monetary Authority to give companies greater freedom to sell yuan bonds.
At the same time, China made it easier for corporations to settle trades in the Chinese currency.
With Hong Kong’s currency — the dollar — pegged to the U.S. greenback and its near-zero interest rates set by the U.S. Federal Reserve, the former colony offers bargains for mainland Chinese visitors as well as borrowing costs that are lower than China’s, which were set at 6.56 percent in July.
Hedging Dollar Bets
That makes it advantageous for foreign companies with China operations to raise yuan in Hong Kong, says Augusto King, co- head of debt capital markets for Asia at Royal Bank of Scotland Group Plc in Hong Kong.Reflecting a trend, McDonald’s Corp. issued 200 million yuan of debt in August 2010, marking the first Dim Sum deal by an overseas nonfinancial company.
Bond sales by Caterpillar Inc. (CAT), Volkswagen AG (VOW) and Tesco Plc (TSCO), leading a charge of over 80 issuers, could bring total sales to 230 billion yuan ($36 billion) this year, a sixfold jump from last year, according to HSBC. The lender forecasts Dim Sum bond sales could total as much as 310 billion yuan in 2012.
Dim Sum bonds are a way for China to hedge its dollar bets. The world’s second-largest economy is promoting the use of yuan in global trade and finance because the weakness of the U.S. dollar may hurt its record $3.2 trillion in foreign-exchange reserves.
Hong Kong’s Ambitions
Dim Sum bonds also provide investment channels for yuan holders outside of China, paving the way for the yuan to be fully convertible and held by central banks as reserve currency, says Frank Song, an economics professor at the University of Hong Kong.The dollar, held in large quantities by most governments in the world as part of their foreign-exchange reserves, is currently the world’s major reserve currency. If the yuan goes global, it’s less necessary for China to hold such huge reserves, Song says.
As for Hong Kong, Dim Sum debt helps it diversify its equities-focused financial market. The bond sales also bolster Hong Kong’s ambitions to become China’s most important offshore yuan-trading center while fending off threats from rival financial centers in Asia.
Since Hong Kong returned to Chinese rule in 1997, the former British colony has steadily lost ground to regional competitors Shanghai and Singapore in terms of GDP.
Mainland Markets
In 2009, Shanghai’s economy exceeded the size of Hong Kong’s for the first time in at least three decades. In coming months, Singapore’s GDP is expected to reach $254 billion compared with Hong Kong’s $245 billion in inflation-adjusted terms, according to International Monetary Fund estimates.Speculation by investors betting that the yuan will appreciate against the dollar is fueling demand for Dim Sum bonds from those unable to access mainland markets.
Yuan deposits in Hong Kong totaled 622 billion yuan in September, up 98 percent from December. That provided a ready pool of funds for investment. By comparison, savings in Hong Kong dollars fell 0.2 percent during the same period...finish reading @source
