ECONOMIC REVIEW(A Monthly Issue) October, April, 2014

Transcription

1 ECONOMIC REVIEW(A Monthly Issue) October, April, 2014 Economics & Strategic Planning Department Latest The Reasons Developments Why the of the Singapore Offshore Economy RMB Bond Has Market Been Outperforming Hong Kong Ying Jian, Senior Economist The offshore Renminbi (RMB) business has experienced a rapid development during the In past 2013, couple the of Hong years Kong as a result economy of the registered introduction 2.9% of real RMB growth cross-border and 4.2% utilization nominal policies growth. Its by per the capita Chinese GDP government. was USD There are CCPI also rose some 4.3% new on developments the year, and with the offshore unemployment RMB rate bond averaged market. 3.3%. Overseas Meanwhile, investors the are Singapore becoming economy's more and more real and interested nominal in growth offshore stood RMB at 4.1% bonds. and Some 4.2% foreign respectively. central Its banks per capita even GDP bought topped RMB USD as foreign CPI reserve. climbed The only identities 2.4% and its unemployment rate was only 1.9%. The two city economies have different economic of offshore bond issuers are also becoming diversified, which include China s Ministry of structures. On the surface, the Singapore economy outperformed Hong Kong on every Finance, domestic financial institutions and corporations, foreign institutions, multinational aspect in But the causes are complicated and close examinations are needed to gauge the companies, degrees of Hong developments Kong enterprises, of the two HK-based economies. Mainland Chinese firms, various banks and foreign local governments. In mid-october, 2014, the UK Treasury announced that it had Economic growth and structure Dai daohua, Senior Economist successfully issued RMB 2 billion sovereign bonds, which attracted widespread attention from overseas markets. This article attempts to explore the characteristics and prospects of One the offshore year's performance RMB bond market does not from tell bond the whole issuance story. and Comparison underwriting of points historical of view. growth over longer period of time makes more sense. In this study, a longer period from 1997 to 2013 and a shorter period from 2004 to 2013 are chosen. The year 1997 was the year when the Asian Financial The Crisis competition hit, and 2004 structure was the of year offshore when RMB Hong Kong bond finally issuance bid farewell to deflation and SARS and embarked on sustained recovery. Since the first offshore RMB bond was issued by China Development Bank in Hong During Kong in the June 17 years 2007, between most of the 1997 issuance and 2013, and the trading Singapore of offshore economy RMB averaged bonds are 5.4% in in Hong real growth Kong. But and from 6.3% 2013, in nominal especially growth in 2014, each the year. offshore Meanwhile, RMB bond the market Hong Kong has experienced economy's average real and nominal growths for the period were 3.5% and 3.4% respectively. Fast some major changes. forward to the period between 2004 and 2013, the Singapore economy's annual real and nominal GDP growths accelerated to 6.3% and 8.4% respectively, while those for Hong Kong First, also the faster Hong at Kong 4.5% market and 5.4%. saw a surge Thus, of no offshore matter RMB how bond it is measured, issuance. The Singapore demand outperformed offshore RMB Hong bond Kong is increasing. growth in In those 2011, years. Hong Kong s RMB bond market experienced a surge. After expanding from the mainland issuers to Hong Kong and other overseas issuers, The the value explanations of issuance for Singapore increased economy's from RMB outperformance 35.8 billion to RMB lie in its economic billion. structure, In 2012 and its exchange 2013, the rate value system of RMB and bonds its foreign issuance workers stabilized policy. at According around RMB to Department 110 billion. of Since Statistics Q4, Singapore, goods producing industries including manufacturing, construction and utilities 2013, Hong Kong s RMB bond market experienced a new climax. According to the data accounted for 23.1% of Singapore's gross domestic product in 2013, amongst which released by the Hong Kong Monetary Authority (HKMA), there are RMB billion dim manufacturing's proportion was 17.5%, covering electronics, medicines, biotech and petrol chemistry. sum bonds Meanwhile, issued during services the first producing three quarters industries of 2014, accounted 40% greater for 66.3% than of the GDP, sum with of last the rest year. being The annual ownerships value will of surpass dwellings RMB and 200 taxes billion on with products. no doubt. In Hong Kong's case, The viewpoints in the Economic Review do not necessarily represent the opinions of the Bank of China (Hong Kong) Limited.

2 Driven by the increasing interests from both issuers and investors, other international financial centers have scrambled to get involved in offshore RMB business. If the issuance of RMB 2 billion bonds from HSBC in London in April 2012 was in line with London s proposed plan of establishing offshore RMB center, then, the issuance of RMB bonds in offshore ex-hk regions in 2013 was promoted by both policies and market demands. After the RMB clearing bank was established in Taiwan, China Trust Bank issued the first RMB Formosa Bond. Within just a few months, TECO, Far Eastern New Century, Deutsche Bank and Chang Hwa Bank all successfully issued RMB Formosa Bond. After the establishment of RMB clearing bank in Singapore, HSBC and Standard Chartered issued RMB Lion City Bond. Other banks were also actively involved in the issuance and underwriting, such as the issuance of RMB 3 billion bonds from Bank of China Singapore Branch. In 2014, offshore RMB bond has expanded to more ex-hong Kong offshore markets. The KFW issued RMB 1 billion Goethe Bond in Frankfurt in April The Bank of China Sydney branch issued RMB 2 billion Oceania Bond in April The Bank of China Luxembourg Branch issued RMB 1.5 billion Schengen Bond in May The Bank of China Paris Branch issued RMB 2 billion Arc de Triomphe Bond in July In addition, the first RMB Emirate Bond emerged in Dubai. Malaysia saw the first RMB Golden Tiger Bond. Switzerland also saw the first RMB bond. In Oct 2014, the Bank of China Seoul branch issued the first RMB Kimchi Bond. According to incomplete statistics, so far 11 ex-hong Kong offshore regions have seen offshore RMB bonds, the value of issuance totaling RMB billion. Among ex-hong Kong offshore markets, London, Singapore and Taiwan are in the leading position. The issuance in these markets is more active than other markets, and the value of issuance has also reached a certain scale. The Singapore market issued RMB 7.5 billion and RMB 4.7 billion in 2013 and 2014 respectively, totaling RMB 13.2 billion. In May 2014, Singapore market participated in the underwriting of RMB 1.7 billion corporate bonds issued by Hainan Airlines, which enhances the diversification of issuers. Taiwan s Formosa Bond market has taken off. Following the RMB 3.9 billion bond issuance from local banks, corporations and foreign banks during the first half of 2013, Taiwan s regulatory authority began to permit mainland corporations to issue RMB bonds in the second half of After that, the Hong Kong Branches of the Bank of China, Bank of Communications, China Construction Bank and Agricultural Bank of China issued RMB 6.7 billion Formosa Bonds. The number of Formosa Bond issuance has increased to 10. In 2014, the Uni-President Enterprises Corporation, the Export-Import Bank of Korea and the Bank of Communications also issued Formosa Bonds, totaling RMB 14.1 billion. Taiwan s regulatory authority intends 2

3 to further promote the development of local RMB bond market by raising the issuance quota of mainland institutions from RMB 10 billion to RMB 25 billion. The RMB bond market in London was born earlier than in Singapore and Taiwan. The total issuance during the past three years is valued at RMB 16.9 billion. However, London market only underwrote RMB 2 billion in It has lagged behind other markets. Furthermore, the issuers are also not diversified. Since 2014, London market has adjusted its strategy by underwriting sovereign bonds to promote market development. Since March 2014, the International Finance Corporation (IFC), an affiliated organization of the World Bank, has issued a number of RMB bonds in London. The total issuance is valued at RMB 4.25 billion. Together with Hong Kong market, London market has underwritten RMB 2 billion bonds issued by China Development Bank. The issuance of RMB government bonds in London further shows the strategy and market characteristic adopted by London, which helps the issuance of RMB bonds exceed 10 billion. In addition, the initiative of issuing RMB government bonds demonstrates a deep intention of the London market. Although London market is determined to build a premier offshore RMB center in Europe, it also faces challenges from other competitors. In order to maintain its edge in RMB trading, London market needs to do something new. The issuance of RMB government bonds not only bring new RMB business but also help gain advantage in offshore RMB bonds pricing and enhance the RMB bond market functions. Such a large number of offshore markets participating in offshore RMB bond issuance will certainly benefit the long term development of the offshore RMB bond market, enhance market confidence, attract more issuers and investors, expand the overall market base and accelerate market development and sophistication. Large volume of sovereign bond issuance improves market quality After several years of development, although still small, the offshore RMB bond market has established the foundation for further development. During the past couple of years, the volume of issuance has maintained at a high level. Ten years later, British government restarted the foreign currency government bond issuance, and furthermore, chose to issue RMB bond. It shows the recognition of the RMB bond market. In terms of the structure of bond issuance, as a matter of long-term institutional arrangement, China s Ministry of Finance has issued RMB bonds in Hong Kong for the seventh consecutive year. The value of issuance has increased from only RMB 6 billion in 3

4 2009 to RMB 23 billion in The total value is RMB 80 billion, accounting for 20.5 percent of issuance of RMB bonds over the same period in Hong Kong. The quote of issuance in 2014 has increased to RMB 28 billion, of which RMB 16 billion have been used. As an offshore RMB bonds issuance platform, Hong Kong is also recognized as the Chinese offshore sovereign bond market. In addition to government bonds, sovereign bond issuance is also divided into several levels. The first is the quasi-sovereign bonds issued by mainland policy banks. During the first three quarters of 2014, China Development Bank, Export-Import Bank and the Agricultural Development Bank have issued bonds valued at RMB 17.5 billion in Hong Kong. The total issuance is valued at RMB 63 billion during The second is quasi-sovereign bonds issued by international agencies and foreign local governments including the Asian Development Bank, World Bank, KfW of Germany and the Province of British Columbia, Canada. The third is the sovereign bond issued by foreign governments. The issuance of RMB bonds by British government makes the sovereign bond issuance structure more perfect. All these kinds of sovereign bond issuance account for above thirty percent of offshore RMB bonds issuance, approaching the issuance structure of the US bond market (in the past 10 years, the US Treasury bonds and bonds issued by government-backed agencies account for 37% on average). The high proportion and multiple types of sovereign bond can help promote the development of offshore RMB business in other markets. The Treasury bonds and S&P AAArated bonds are high-quality assets in financial markets, which have always been regarded as collateral with good liquidity, and are particularly attractive to both governments and commercial organizations. The commercial banks in Hong Kong have been using all kinds of RMB sovereign bonds in the interbank market as the main collateral. The HKMA and the RMB clearing bank also use them as the main tool for liquidity management. This will help commercial banks better manage risk during product development, and promote the innovation activities among offshore RMB markets. From the viewpoint of pricing mechanism, the large scale of issuance and long maturity of bonds are conducive to the formation of CNH bond market s yield curve. Hong Kong s offshore RMB bond market came into being just a few years ago. The size of single issuance was small, which is the reason why the market is called dim sum bond market. In recent years, the situation has greatly improved. In May 2014, the single issuance of the RMB bonds through the HKMA CMU system tender is valued at RMB 16 billion. The single issuance of the RMB bonds from CDB and Export-Import Bank is valued over RMB 4 billion. The IFC has issued several bonds worth RMB 4.25 billion in total during Mar Sep The term structure of government bonds includes 2,3,5,7,10,15,20 and 30 years. As more and more RMB 4

5 government bonds were issued, the yield curve gradually comes into being. The maturity of quasi-sovereign bonds issued by policy banks is also extended to 15 years. The yield curve is also initially formed. The RMB bonds issued by international organizations and foreign governments may provide an alternative pricing reference for the market. The development of offshore sovereign bond issuance has attracted more and more high quality issuers. Some well-known multinational companies including British Petroleum, Siemens, Caterpillar, Unilever, Ford, and Volkswagen, and large state-owned mainland enterprises including Petro China and Baosteel all stepped into this market. The investment grade offshore RMB bond market gradually comes into being. It is believed that there will be a yield curve in the future. Together with low rating or no rating bonds, the pricing mechanism of offshore RMB bond market is in the process of continuous improvement. It also lays a foundation for the offshore RMB bond market to become an international bond market. With regards to the structure of investors, at the early stage, the issuance of RMB bond market in Hong Kong was mainly targeting investors from Hong Kong and the rest of Asia. Recently, after strengthening their marketing and business development activities, the underwriting agencies in Hong Kong can reach the US and EU markets. The demand from the US and EU investors is increasing. But as a whole, Asian investors still dominate. According to the data provided by some investment banks, during , the average proportion of Asian investors is 87%, and the EU and US investors account for only 9.5% in total. As more and more EU/US organizations get involved in bond issuance, the investors origins will be more diversified. The issuance of RMB 2.5 billion bond from the Canadian Province of British Columbia was mainly targeting North American investors. It received warm welcome from local markets. Investors from Asia and the EU participated in the issuance of RMB bonds from British government. Asian investors account for 57%, and the EU investors account for 43%. The distribution of investors origins is more balanced. From the viewpoint of Hong Kong market, the extension of RMB bond investors to the US/EU markets will not challenge Hong Kong s position as the most important offshore RMB bond market. Except for such cases that bonds are not allowed to be sold to local investors because of regulatory requirements (such as the US 114A rules), international bond markets are basically the same. Targeted issuance is rare. The offshore RMB bond market is the same. Asia and the EU are currently the two most important markets. The underwritings should just follow investors. It is very common for issuers to select multiple underwriting platforms in both Asia and the EU. The strengths of various offshore RMB bond markets depend on such factors as the relations between underwriters and issuers, service capability and client 5

6 coverage, as well as the pool of RMB funds and other market infrastructure. Hong Kong market possesses strong competitive advantages considering its solid foundation of offshore RMB business and close relations with mainland China. Offshore RMB bond market will take time to mature While the offshore RMB bond market has been progressing encouragingly, it is still a startup market. The gap compared with developed markets is huge. First, the market size is small. According to BIS data, by the end of June 2014, outstanding global international bonds (offshore bonds) reaches USD 23.1 trillion, mainly in the US and EU markets. Outstanding international bonds in the US and UK are USD 3 trillion and USD 2.9 trillion, respectively. Hong Kong s RMB bond market is just a very small fraction of that. Second, secondary trading is not active. SWIFT statistics show that the turnover in value of offshore RMB bond in September 2014 is USD 84 billion, which means that the daily average is less than USD 3 billion, ranked No. 19 among all currencies. In the same month, the Euro and the US dollar bond trading reached USD 54 trillion and 22 trillion respectively (daily average turnover of USD 2.5 trillion and USD 1 trillion). The recent developments in the offshore RMB bond market demonstrate the markets strong interests and confidence. I believe that offshore RMB bond issuance should maintain the existing structure and characteristics. Mainland China has pledged to consider the issuance of RMB bonds in Hong Kong as a long-term institutional arrangement, and also promised to gradually expand the scale of the issuance of government bonds and other agency bonds. There will be more and more sovereign bond issuance in the Hong Kong market, which provides the basic guarantee of maintaining a high level RMB bond market. The successful issuance of RMB sovereign bonds from the World Bank and the British government will play a showcase effect. I believe that more and more international organizations and foreign governments will be involved in offshore RMB market. Of course, the development of offshore RMB bond market mainly depends on market forces, in particular, the business development ability of RMB bond underwriting agencies in Hong Kong and other regions. I believe that mutual cooperation can broaden the base of issuers and investors, and strengthen the activities of offshore RMB bond market. If so, it will be just a matter of time for the offshore RMB bond market to progress further. 6

7 主 要 經 濟 指 標 (Key Economic Indicators) 一. 本 地 生 產 總 值 GDP /Q1 2014/Q2 總 量 ( 億 元 ) GDP($100 Million) 19,644 20,372 5,174 5,309 升 幅 (%) Change(%) 二. 對 外 貿 易 External Trade /9 2014/1-9 外 貿 總 值 ( 億 元 ) Total trade($100 Million) 港 產 品 出 口 Domestic exports 轉 口 Re-exports 33,755 35,053 3,278 26,603 總 出 口 Total exports 34,343 35,597 3,320 27,024 進 口 Total imports 39,122 40,607 3,824 30,886 貿 易 差 額 Trade balance -4,778-5, ,862 年 增 長 率 (%) YOY Growth(%) 港 產 品 出 口 Domestic exports 轉 口 Re-exports 總 出 口 Total exports 進 口 Imports 三. 消 費 物 價 Consumer Price 綜 合 消 費 物 價 升 幅 (%) Change in Composite CPI(%) 四. 樓 宇 買 賣 Sale & Purchase of Building Units 合 約 宗 數 ( 宗 ) No. of agreements 115,533 70,503 7,996 59,487 年 升 幅 (%) Change(%) /6-2014/8 2014/7-2014/9 失 業 人 數 ( 萬 人 ) Unemployed(ten thousands) 失 業 率 (%) Unemployment rate(%) 就 業 不 足 率 (%) Underemployment rate(%) 五. 勞 動 就 業 Employment 六. 零 售 市 場 Retail Market /8 2014/1-8 零 售 額 升 幅 (%) Change in value of total sales(%) 零 售 量 升 幅 (%) Change in volume of total sales(%) 七. 訪 港 遊 客 Visitors 總 人 數 ( 萬 人 次 ) arrivals (ten thousands) 4,862 5, ,991 年 升 幅 (%) Change(%) 八. 金 融 市 場 Financial Market /8 2014/9 港 幣 匯 價 (US$100=HK$) H.K. Dollar Exchange Rate (US$100 = HK$) 貨 幣 供 應 量 升 幅 (%) change in Money Supply(%) M M M 存 款 升 幅 (%) Change in deposits(%) 總 存 款 Total deposits 港 元 存 款 In HK$ 外 幣 存 款 In foreign currency 放 款 升 幅 (%) in loans & advances(%) 總 放 款 Total loans & advances 當 地 放 款 use in HK 海 外 放 款 use outside HK 貿 易 有 關 放 款 Trade financing 最 優 惠 貸 款 利 率 (%) Best lending rate (%) 恆 生 指 數 Hang Seng index 22,657 23,306 24,742 22,933