Banks home in on Hong Kong dollar bonds
The Hong Kong bond market, Asia's second-biggest after Japan, is attracting more local banks and has just ushered in a new era of yuan-denominated bonds, but deal flows are still mainly supported by European and Australian banks that are tapping into liquidity in Hong Kong.
Local and foreign commercial banks have dominated the primary market, raising HK$82billion, or 76 per cent of the HK$108billion worth of Hong Kong dollar bonds issued this year, up 15 per cent from a year ago, according to Thomson Financial. Among other factors driving this increase is the funding needs of Hong Kong banks that plan to expand further into the mainland.
Bank of East Asia, now one of the four foreign banks allowed to accept yuan deposits in China, has raised HK$5.1billion from the largest issuance of non-government paper in the Hong Kong bond market at the end of April.
Mid-sized Wing Lung Bank also aims to expand in the mainland, particularly in the Pearl River Delta, and has come to the market three times this year, raising HK$620million.
Dah Sing Bank, which took a 17 per cent stake in Chongqing Commercial Bank, is the most frequent player in Hong Kong's bond market among its peers and has raised HK$950million with six issues this year.
Citic Ka Wah Bank, which wants to incorporate in the mainland, raised HK$3.1billion in Hong Kong's debt market with three issues.
'We are starting to see more local banks increase their funding plans via the Hong Kong dollar certificate of deposit [CD] market, mainly to fund their growth in Hong Kong and China,' said Peng Meng Ling, regional head of capital markets in Greater China and Japan at Standard Chartered Bank (Hong Kong). CDs are generally issued by commercial banks with terms ranging from one month to five years.
The completion of recent issues from local banks, especially the big Bank of East Asia issue, implies that the Hong Kong dollar-denominated bond market has the depth and efficiency to meet more funding needs from lenders.
'There is demand from investors in well-known local banks. There was not much supply [from issuers] before because most bank issuers did not have much need for funding,' Mr Ling said.
Of the new issues by Hong Kong lenders, most are fixed-rate debt, with floating-rate notes comprising a smaller proportion.
Fixed-rate debt accounted for 78 per cent of total debt issuance. The total amount of outstanding fixed-rate debt grew by 18 per cent at the end of the year, according to data from the Hong Kong Monetary Authority.
Floating-rate debt grew at a much slower pace than fixed-rate debt last year, with issuance growing 5 per cent to HK$52billion. The proportion of floating-rate debt to total debt issuance fell to 22 per cent last year from 26 per cent in 2005.
However, floating-rate debt may become more attractive because investors expect interest rate rises in major economies to curb inflation.
'Apart from fund managers who are fundamentally fixed-rate investors, banks are the dominant investors; most of them are absolute yield investors so they prefer fixed-rate. Traditionally, the fixed-rate volume is much larger than the floating-rate format. There will be some shift from fixed to floating when investors think rates will go up,' Mr Ling said.
Foreign commercial and investment banks are also interested in Hong Kong-dollar bond issuers. They tap the market to raise funding for their Hong Kong business expansion or exchange the proceeds into US dollars in the swap markets.
Foreign commercial and investment banks have raised HK$78.8billion through the currency debt market in Hong Kong, representing 87 per cent of total money raised by foreign issuers.
'Most European and Australian banks have stable and large yearly funding plans, and their pricing targets are fairly transparent,' Mr Ling said.
'Execution is efficient and this trend will continue as long as the Hong Kong dollar bond market continues to provide the liquidity.'
Banks from the mainland are not big players, but this is changing as policy and technical hurdles are cleared for yuan bond sales.
China Development Bank is now selling 5billion yuan worth of two-year notes, and several mainland banks are planning to issue 10billion yuan worth of bonds in Hong Kong to tap a market still limited by the city's yuan deposits, which stood at 25.48billion yuan in April.
China Export-Import Bank plans to issue 2billion yuan worth of three-year notes; China Construction Bank will issue notes worth 5billion yuan and Bank of China will issue 3billion yuan of notes in Hong Kong after shareholder and government approval.
In a recent report, Citigroup economists Joe Lo and Patricia Pong said: 'A yuan bond market has significant potential in Hong Kong if it has China's wholehearted backing. We think yuan bonds in Hong Kong could grow to 90billion yuan in a few years. This would give a strong boost to Hong Kong's bond market as the outstanding amount of exchange fund notes issued by the Hong Kong Monetary Authority totalled only HK$62billion in May.'
