Bangkok--20 Jan--Moody's Investors
The progressive internationalization of mainland China's currency, the Renminbi (RMB), will facilitate continued growth in Hong Kong of RMB-denominated bonds, according to a report released today by Moody's Investors Service, the credit-rating agency.
Called "dim sum" bonds when settled in RMB or "synthetic" if settled in other currencies such as U.S. dollars, these debt instruments have so far come out primarily in Hong Kong, with several synthetic convertible bonds in Singapore. However, the report's lead author, Dominique Gribot-Carroz, a Moody's vice president, says, "We may see more euro-RMB bonds issued in other financial centers and Chinese authorities allowing offshore RMB transactions elsewhere."
Moody's says it will issue a follow-on comment within a few weeks to answer investors' frequently asked questions on its approach to rating dim-sum and synthetic bonds.
Gribot-Carroz adds, "The rapidly expanding volume of Hong Kong's deposits and of trade settlements in RMB has driven growth in dim-sum bonds, and the Chinese government's recent allowance for Chinese enterprises to settle direct overseas investments in RMB will catalyze this trend."
However, the market is still at an early stage, and evolving regulations for RMB business in Hong Kong will determine the speed and sustainability of its growth.
She notes, "We have already seen a diversification in the types of issuers and issuances for dim-sum bonds, with corporate-bond tenors of three years or less, but expect the market to become more liquid, as broader participation from institutional investors leads to the development of a secondary market."As of January 14th, 2011, the total outstanding issue of dim-sum bonds remained modest, at RMB66 billion (US$10 billion).
A second author of the report and Moody's vice president, Ivan Chung, notes that expectations of the RMB's appreciation will drive demand for synthetic RMB bonds settled in U.S. dollars because investors value the exposure to a presumed strengthening of China's currency.
Chung says, "As an offshore funding channel, some high-yield issuers, such as Chinese property developers, may favor synthetic RMB bonds over plain-vanilla, U.S. dollar issuance. Until now, straight U.S.-dollar bonds have served as their mainstay for overseas funding." He explains that the bulk of developers' revenues come in RMB, but the real borrowing cost of U.S. dollar debt depends on the exchange rate at time of repayment. Chung says, "A synthetic RMB bond allows Chinese issuers to avoid exchange-rate risk and, at time of issuance, lock in borrowing for lower cost by transferring to investors the benefit of an expected future appreciation of the RMB."
Moreover, getting approval from Chinese authorities to remit to mainland China their overseas bonds' proceeds in RMB could prove more difficult than using funds received in U.S. dollars, thus also making synthetic bonds an attractive alternative to dim sum ones.
The report, entitled, "The Current Menu for Renminbi Bonds in Hong Kong:
Dim Sum or Synthetic?" is available at www.moodys.com.