Steve Wang: Utilizing On- and Off-shore RMB Bond Markets for “Belt & Road” Financing Needs

This article first appeared in Globle Times. Steve Wang, Senior Research Fellow of IMI, Head of Fixed Income Research at BOCI  Since 2013, China's " Belt and Road (B&R)” initiative for international economic development has become one of the most prominent investment themes in the global capital markets. The initiative covers 65 countries along the ancient land and marinetime Silk Roads, a region accounting, as of 2015, for about 62% and 16% of the global population and GDP, respectively. According to Xinhua News Agency, China has signed a total of USD$126bn of foreign project contracts in B&R countries during 2016, covering infrastructure projects in energy, transportation, real estate and metal/mining. These B&R infrastructure investments will create large financing needs in the world that can look up the capital markets for supports. The B&R projects will rely on funding from multiple fronts. They include, but not limited to, international financial agencies, regional funding organizations and commercial banks.  On the eve of the first “Belt and Road Forum for International Cooperation (BRF)” held on May 14-15,  Mr. Zhou Xiaochuan, Governor of the People's Bank of China, wrote an article outlining an 8-point proposal on issue of B&R financing. Among the eight points, two promote the B&R roles of global financial centers and local currency markets. Hong Kong can certainly contribute very significantly to these two areas. Being one of the three major global financial centers and also the first-established, now the largest offshore renminbi (RMB) center, Hong Kong enjoys many advantages to uniquely serve the financial needs of B&R, whether from its leadership in the offshore RMB market or from its growing capital market connections with the Mainland. This is especially true in the bond market front. We believe the growing maturity of the domestic Panda Bond market and the Offshore (Dim-Sum) RMB bond market has a great potential to meet many of the B&R funding needs, particularly when considering that the Chinese financial institutions and enterprises are among the major participants in B&R programs, ranging from project funding, equipment supply to material sourcing, personnel involvement, and etc. Indeed, President Xi has mentioned in his theme speech at the BRF the use of RMB as one of the financing currencies for B&R initiative. The two RMB bond markets have accumulated large amount of precedence and experience over the years of development. Being the third largest bond market globally, China’s local currency bond market offers a rich product variety and a broad investor base as the foundation for both the panda bond market and the offshore RMB bond market to expand. Our statistics show that the issuance of panda bonds has become quite active since 2015, with a total issuance volume jumped to RMB132bn in 2016. Although the offshore RMB bond issuance volume has declined in recent years from its record of RMB 282 bn in 2014 to RMB117 bn in 2016 (largely due to the lower onshore funding costs), the percentage of bond issuance from international borrowers continues rising over the past two years, to a 58% share in 2016 (vs. 55% in 2015). Overall, we believe the further opening up of the domestic bond market over the past year will not only help expanding the Panda Bond market further, but also strengthening the integration and connection between the offshore and onshore RMB bond markets, by which the offshore RMB bond market can maintain its vitality and both markets can become a major B&R financing channel. And we see a huge potential. As of 2017, only 11 out of the 65 B&R countries have seen issuance of Panda Bonds or Dim Sum Bonds from their institutions or corporations (see figure). They were Hungry, India, Malaysia, Mongolia, Qatar, Russia, Thailand, Poland, UAE, South Korea and Singapore. Among them, only three have seen Panda bond issuance (Poland, South Korea and Russia). As of the end of April 2017, their total outstanding amounts in Panda and Dim Sum bonds stood at RMB7 bn (accounted for 5% of the market) and RMB39.9 bn (accounted for 8%), respectively. Apparently, financing uses of the Panda and Dim Sum Bond markets by B&R countries are still very limited. This simple signifies a great potential for future expansion, an opportunity that Hong Kong’s financial firms can seize and play. We believe the two RMB bond markets will attract more B&R issuers for fundraising in the future, thus allowing the financial resources for B&R developments more diversified and market-based.

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