HSBC Holdings PLC said on Wednesday that it plans to issue a yuan-denominated bond in London, the first issue of a dim sum bond in the city, marking a milestone in London's efforts to become a centre for offshore yuan trading alongside Hong Kong.
The announcement of the bond issue by Europe's biggest bank coincides with the launch by the City of London Corporation of a working group including five major banks to develop the city into a major centre for offshore yuan business, which was welcomed by British finance minister George Osborne.
It is the ambition of the British government to make London a western hub for the sector - with all the benefits that this will bring to our own economy, Osborne said in a speech.
This is a significant moment, Osborne said. This builds on the progress London has already made toward becoming the western hub for RMB. [ID:nL6E8FI1O2]
HSBC leads the league tables as a book runner for dim sum bonds in Hong Kong, having led 48 issues so far this year with proceeds of 13.9 billion yuan ($2.2 billion) as of April 12, according to Thomson Reuters data.
It has released guidance that the three-year bond would yield 3.00-3.25 percent, IFR, a Thomson Reuters publication, reported earlier on Wednesday, citing a term sheet provided to investors.
The term sheet said the issue was a benchmark deal, implying it is worth at least 500 million yuan ($79.4 million).
The order book had already topped 1 billion yuan by mid-afternoon on Wednesday and was growing fast, IFR reported. The deal was expected to be priced in the afternoon in London.
UK 3-year gilts are currently yielding around 0.562 percent with comparable U.S. Treasuries at 0.4145 percent.
HSBC did not elaborate on why it chose to underwrite its own bonds. But analysts said it was probably selling its own bonds in part as a way of helping to kick-start the yuan bond market in London.
There's already a growing yuan deposit base in London, and HSBC probably wants to be first to capture that market, said Patrick Pong, an analyst at Mirae Asset Management in Hong Kong.
COOPERATION WITH HONG KONG
London and other financial centres like Singapore are seeking to capitalise on the rapid growth of the offshore yuan bond market in Hong Kong since its launch less than two years ago, as investors aim to put their yuan deposits to work by buying high-yielding yuan bonds.
Hong Kong, the leading offshore yuan centre, is actually cooperating with them in doing so, with the Hong Kong Monetary Authority in January signing an agreement with Britain to co-operate on offshore yuan trading, including the HKMA extending the operating hours of its renminbi settlement system into the London day.
London still has a long way to go before its dim sum market can compete with Hong Kong's in terms of volume. Customer and interbank yuan deposits in London totalled 109 billion yuan at the end of 2011, according to a report published by the City of London Corporation in conjunction with the launch of the working group.
However, that is far less than the 566 billion yuan in renminbi deposits in Hong Kong as of February, suggesting Hong Kong will remain the most important offshore yuan centre for some time to come.
Other banks are also said to be planning to tap the London market to issue yuan-denominated debt, including Agricultural Development Bank of China, China Development Bank and the Export-Import Bank of China.
For more dim sum bonds to come, the pool size (in London) needs to be increased, said Kelvin Lau, regional economist at Standard Chartered.
The latest steps by London come amid significant currency reforms by Beijing, including a widening of the yuan's trading band to 1 percent from 0.5 percent that went into effect on Monday. The change takes China one step closer to its goal of having a basically convertible yuan by 2015.
Chinese regulators this month also increased the quota for the Renminbi Foreign Qualified Institutional Investor (RQFII) programme, which allows Hong Kong investors to purchase yuan-denominated funds using yuan accumulated offshore, to 70 billion yuan from 20 billion yuan.
The groundbreaking deal is expected to be rated Aa2/AA- (Moody's/S&P), the same as HSBC Bank's Aa2/AA-/AA (Moody's/S&P/Fitch). ($1 = 6.3015 Chinese yuan)
(Additional reporting by Kelvin Soh and Michelle Chen in HONG KONG; Editing by Jason Subler & Kim Coghill)