Chinese Banks to Sell Yuan Bonds in Taiwan

TAIPEI – Taiwan is allowing Chinese companies to issue yuan bonds on the island following a similar move by Hong Kong that increases the use of the Chinese currency in offshore markets, and Chinese banks are set to be the first issuers.

Earlier this year, Taiwan allowed companies—except those from China—to issue yuan bonds for the first time. Already, companies have raised nearly 4 billion yuan (US$656.4 million) through the sale of six bonds in the island’s fledgling yuan-bond market, and the Financial Supervisory Commission’s decision Wednesday to allow Chinese companies to issue yuan bonds to institutional investors will help deepen Taiwan’s bond market.

Major Chinese lenders including Bank of Communications Co., Agricultural Bank of China Ltd. and China Development Bank are set to be among the first issuers of yuan-denominated bonds, or Formosa bonds, in Taiwan.

YUAN“The Taiwanese are among the most important credit investors in the region, so I think Taiwan will continue to be a thriving [offshore yuan] market, even though it appeals more to domestic investors, unlike Hong Kong,” said Guy Stear, Asia head of research at Société Générale.Hong Kong was the first offshore yuan market and remains the biggest by volume. As part of Beijing’s push to promote the use of the Chinese currency offshore, it has struck various deals with Taipei, Singapore and London in the past year ranging from yuan clearing to swaps to investment products to quotas for investments in Chinese stocks and bonds.

Taiwan’s onshore banks started taking yuan deposits in February, after Beijing and Taipei established a direct yuan-clearing system in late January. Taiwan’s domestic yuan deposits totaled 123.25 billion yuan by the end of October, a fraction of Hong Kong’s pool of around 730 billion yuan.

Taiwan’s institutional investors are channeling most of their overseas yuan funds into Hong Kong-issued yuan bonds, which are also known as dim-sum bonds, the regulator said. The new rule is likely to bring some of those funds back to the island.

China’s policy banks, state-owned banks, commercial banks and their overseas branches will be able to issue yuan bonds after gaining approval from Taiwan’s GreTai Securities Market, which offers over-the-counter trading mechanisms for local bonds, Taiwan’s financial regulator said. China-based subsidiaries of Taiwanese financial institutions and affiliates of Taiwan-listed Chinese companies also qualify, it said.The Hong Kong branch of China’s Bank of Communications, or BoCom, submitted its application Wednesday to issue 1.2 billion yuan ($197 million) worth of Formosa bonds, underwriter HSBC Holdings PLC said.

“Demand for the BoCom yuan bond is very strong and it is already oversubscribed,” said Adam Chen, head of global markets in Taiwan at HSBC.

“Orders are still coming in,” he said.

“Taiwan is a newly opened market. Many Chinese companies are indeed very interested [in issuing yuan bonds in Taiwan].”

Agricultural Bank of China’s Hong Kong branch also plans to issue 1.0 billion yuan bonds, an official at GreTai said. BoCom could get the green light as early as this week and must list the bonds on GreTai within one month of obtaining approval, the official said.Apart from the two Chinese lenders, policy bank China Development Bank is preparing to issue yuan bonds in Taiwan within the next two months, a person familiar with the situation said, without providing further details.

With a wider selection of bonds, “foreign investors, such as hedge funds in Singapore, will also become more interested in yuan bonds issued in Taiwan…and that will certainly help boost the domestic yuan businesses,” said Hunter Yeh, head of fixed income, currencies and commodities trading at UBS AG’s Taiwan operations.

Taiwan requires foreign investors to pay a 15% tax on bond investments, while locals are subject to a 10% tax. In neighboring Hong Kong, all bonds are tax-free.

“But still there are incentives for both issuers and investors [in Taiwan,]” said Frances Cheung, a strategist at Crédit Agricole.

Local investors, especially insurers, are keen on investing in yuan bonds, while strong demand for the instrument could encourage Beijing to allow Issuers to sell more yuan bonds offshore, Mr. Cheung said.

– WALL STREET JOURNAL

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