London calling for dim sum bonds

The UK capital is keen to take advantage of the liberalisation of the Chinese currency

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London’s financial centre has always had a global outlook. This has led it to target one of the most promising areas of the international financial system: China’s currency.

Beijing maintains tight capital controls that prevent the free flow of renminbi between the Chinese mainland and the rest of the world. But over the past three years, China has liberalised some of its currency controls to enable local companies to reduce their reliance on the US dollar for trade.

Given the size and growth prospects of China’s economy, the renminbi could emerge as one of the world’s largest and most important currencies, whether for trade or capital markets. This potential has naturally attracted London.

“London is the world’s largest foreign exchange centre, and we want the City to play a major part in what could be the world’s most important currency in the future,” says Mark Boleat, chairman of the City of London’s policy and resources committee. “Renminbi business will be a growing part of the financial ecosystem of London.”

One of the most high-profile aspects of Beijing’s drive to liberalise and internationalise its currency has been the development of an offshore bond market denominated in renminbi. Such instruments have been dubbed “dim sum” bonds, named for the Chinese delicacy.

Up till now, the dim sum market has predominantly been based in Hong Kong. Issuance has been dominated by mainland Chinese companies, but a small number of international companies have also sold dim sum bonds, including McDonald’s, the fast-food chain, Tesco, the UK supermarket group, and KfW, Germany’s national development bank.

Interest has tailed off somewhat recently. A large part of the demand was driven by the expectation that the Chinese renminbi would appreciate against other important currencies but this has not been the case this year. As a result, dim sum issuance has fallen to $5.4bn so far this year, after peaking at $13.9bn last year, according to Dealogic, the data provider.

Nonetheless, London is keen to benefit from the undoubted potential of renminbi business. On April 18, the City of London Corporation launched its “London-RMB initiative”, and HSBC, the Asia-focused UK bank, sold the first ever dim sum bond in London.

“The European-based issuers who have sold dim sum bonds all saw strong demand from European investors, so it was natural for us to sell and market our own international renminbi bonds in London,” says Spencer Lake, co-head of global markets at HSBC.

George Osborne, the UK chancellor of the exchequer, has also championed London’s credentials, citing its “long history of global financial inventiveness” in a speech at the City of London’s April conference. “[Renminbi] trading is the next step along a 400-year road,” he said.

So far, there have been no more dim sum bonds sold in London, despite speculation that HSBC’s Rmb2bn ($300m) issue would be followed by state-controlled Chinese banks.

Mr Boleat is confident that there will soon be more sales in the UK capital. “We think the market will be expanding quite rapidly,” he says. “Dim sum bonds are part of the puzzle. It’s still a small market, but I’m sure its development will continue to accelerate.”

However, the UK market’s growth is likely to be slow and gradual. According to the City of London Corporation, there was only Rmb109bn ($17bn) of renminbi-denominated deposits in London at the end of 2011, against Hong Kong’s Rmb566bn ($89bn). This will make London a comparatively less attractive place for companies to issue dim sum bonds, given the more ample liquidity available in Asia.

Even Hong Kong’s renminbi deposit base is relatively modest, given the size of the Chinese economy. This is because the tight controls that China maintains on the flow of currency between the mainland and the rest of the world include the flow to its own offshore financial centre.

Mr Boleat concedes that other challenges remain, primarily technical work such as changing the opening hours in Hong Kong to better fit in with the trading day in London, improving the clearing and settlement mechanism, and educating potential investors and borrowers on the market.

What role London will play will also depend on Beijing. The Chinese authorities are keener on small steps forward rather than a “big bang” approach to liberalising its currency.

Yet analysts and bankers say London is in a good position to take advantage of the Chinese currency’s increasing usage around the world. Europe accounts for almost half of all global renminbi trade payments outside China and Hong Kong, and London handles the majority. In total, the UK handles 26 per cent of the global offshore renminbi spot foreign exchange, according to the Treasury.

Underscoring London’s pole position for global renminbi flows, Citigroup, the bank, launched full UK cash management and trade finance products for the Chinese currency in May.

“At the end of the day, there’s a significant pool of money interested in the renminbi that isn’t based in the Asian timezone,” says Mr Lake. “London has the timezone to tap into that, and the sales and trading, foreign exchange... infrastructure that is second to none.”

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