Taiwan favoured centre for yuan bonds

Bocom first from the mainland to issue Formosa notes after Taipei changes policy

PUBLISHED : Monday, 02 December, 2013, 5:19am
UPDATED : Monday, 02 December, 2013, 6:08am

More mainland firms, especially banks, are expected to pick Taiwan as their top destination for issuing offshore yuan bonds, with the island opening the door for the first time to mainland issuers last week.

Taiwan in February allowed companies from anywhere except the mainland to issue yuan bonds there. But in a landmark deal last week, Taipei reversed the policy by allowing Bank of Communications, the mainland's fifth-largest lender by assets, to issue 1 billion yuan (HK$1.27 billion) of the so-called "Formosa bonds".

With no Formosa bonds sold since Deutsche Bank's offering in June, the Bocom issue was a timely move to revive the island's yuan bond market, analysts said.

Yuan deposits in Taiwan totalled 123.2 billion yuan in October while outstanding Formosa bonds stood at 3.9 billion yuan.

"The gap means demand should be supportive of new issues at reasonable yield levels," HSBC fixed-income analyst Crystal Zhao said.

Bocom priced the yield for its five-year tranche at 3.7 per cent, higher than China Development Bank's five-year tranche in Hong Kong that was priced at 3.6 per cent, reflecting the demand for the notes in Taiwan.

"The cost of issuing Formosa bonds is lower than China onshore funding, which would attract more issuers willing to tap the bond market there. However, the total size of new issuance is subject to the Taiwan regulator's approval," Zhao said.

Another factor driving more firms to offer debt in Taiwan and other offshore centres is the surging onshore bond yields. The 10-year onshore government bond yield has risen to a nine-year high on tightened interbank liquidity.

"Rising onshore yields would pressure offshore yuan bond yields as well. But the effect may not be immediate when you have a strong currency expectation," Zhao said.

Bank of China's Taiwan unit, set up in February, has been offering high yuan deposit rates to local banks to encourage them to accept the currency.

The island's deposit base soared 120 per cent in the first half of this year, putting the island on track to become the world's fourth-largest offshore yuan hub after Hong Kong, London and Singapore.