Following the recent announcement from the People’s Bank of China to widen its currency (Renminbi or RMB) trading band against the US dollar , analysis* conducted by Linklaters highlights that the internationalisation of the RMB is creating new markets and opportunities for Chinese and European corporates as well as financial institutions.
The analysis coincides with a seminar on the issue jointly hosted by Linklaters and ICBC, which took place yesterday in Amsterdam. More than 250 corporate leaders, bankers and regulators across Europe and Asia attended the event, to discuss the developments being witnessed.
Key findings show that international companies are continuing to turn to the offshore RMB (often referred to as ‘dim sum’) bond market to support their growth opportunities in the region. This market has developed fast, with total issuance rising to $21.1bn since the start of 2011. Foreign RMB issuance** from this total amounts to $4.9bn, of which 40 per cent comes from Europe.
Whilst the last three months of 2011 saw fewer of these foreign issuances, at just over $550m, due largely to market uncertainty and the European sovereign debt crisis, demand for the Yuan-denominated bonds has picked up dramatically in 2012. Whilst this year started slowly, the value of foreign offshore RMB bond issuance currently totals approximately $1.4bn, with just over $800m raised alone in March.
A broader range of issuers from Europe has also been seen in 2011 and so far in 2012, including France ($720m), Germany ($690m), UK ($375m) and Austria ($120m). New regional entrants to the market in 2012 include the Middle East ($160m) and Latin America ($160m), demonstrating further development of international usage of China’s offshore currency. In addition to the continued interest from the US in 2011 and 2012 for offshore RMB bonds ($845m), there is also growing issuance activity from Asia-based companies during this period, in particular from Japan ($560m), Singapore ($460m), South Korea ($320m) and Taiwan ($150m).
Linklaters pioneered in 2010 the documentation of these bonds that allow issuers to invest the proceeds of their offshore issues in assets on the Chinese mainland. The continuing growth and diversification of these bonds suggest it will be another strong year as more international firms turn to the offshore RMB bond market and the offshore currency sheds its parochial “dim sum” origins to become the latest eurocurrency.
“The restrictions on convertibility have eased over the past two years and the Renminbi is developing fast into an international currency,” says Weiwu Zhang, ICBC's managing director in Amsterdam. He points out that already in 2011 ten per cent of all foreign trade with China was settled in RMB, against less than one per cent in the first quarter of 2010.
‘’China will soon export more capital than it imports,’’ says Andrew Malcolm, Linklaters capital markets partner, based in Hong Kong, and also speaker at the event. ‘’Capital controls are often assumed to be there to keep foreign ‘hot money’ out, but they could turn out to be what is keeping Chinese capital in.’’
Over the past 15 months companies from Mainland China have spent $55bn on acquisitions overseas (excluding Hong Kong). In spite of ongoing volatility they saw good buying opportunities in Western Europe, leading to 47 large transactions worth $16bn. Outbound M&A is valued at two and half times as much as inbound M&A investment by foreign companies in assets in Mainland China, which amounts to a still impressive $21bn. Hong Kong adds to this dominance of outbound investment, with $14bn acquired overseas (excluding China) versus $10bn inbound M&A since January 2011. Overseas direct investment will not only continue to outstrip inbound foreign direct investment, but will also be available in Renminbi, Malcolm predicts.
The various speakers at the seminar underscored that unchaining the RMB is not a experiment localized in Hong Kong, but an essential plank of Chinese global policy. The project is driven by domestic economic imperatives, recognised also in the 12th Five-Year Plan. The global reach of the RMB is confirmed by the cooperation of the Hong Kong and UK, announced in February, to develop London as a major offshore RMB market, effectively easing access to the currency in the European time zone.
*Source data: Thomson Reuters, as at 27 March 2012 (please note that the data is continuously updated and subject to change)
** Excludes issuers where the parent is based in China / Hong Kong
(Press Release by Linklaters)
