Yuan bonds to support Belt and Road financing

By Wang Wei Source:Global Times Published: 2017/5/17 22:43:40

Belt and Road set to stimulate demand for financing

Illustration: Peter C. Espina/GT

Since 2013, China's Belt and Road (B&R) initiative has become one of the most prominent investment themes in the global capital markets. According to the Xinhua News Agency, China signed foreign project contracts in B&R countries worth a total of $126 billion during 2016, covering energy, transportation, real estate and metal mining. These B&R infrastructure investments will create significant new demand for financing.

The B&R projects will rely on funding from multiple sources. These include international financial agencies, regional funding organizations and commercial banks. Ahead of the first Belt and Road Forum for International Cooperation (BRF), Zhou Xiaochuan, governor of the People's Bank of China, wrote an article outlining an eight-point proposal on the issue of B&R financing. Among the eight points, two promote the role of global financial centers in the B&R initiative and the use of local currencies. Hong Kong can certainly contribute very significantly to these two areas.

Being one of the three major global financial centers and also the largest offshore yuan center, Hong Kong enjoys many advantages to serve the financial needs of the B&R, including its growing capital market connections with the Chinese mainland. This is especially true in the bond market. We believe the growing maturity of the domestic Panda bond market and the offshore dim-sum yuan bond market has great potential to meet many of the B&R funding needs, particularly when considering that Chinese financial institutions and enterprises are among the major participants in B&R programs, ranging from project funding and equipment supply to material sourcing.

The two yuan bond markets have accumulated a large amount of experience over the years of their development. Being the third largest bond market globally, China's local currency bond market offers a rich product variety and a broad investor base as the foundation for both the Panda bond market and the offshore yuan bond market to expand.

Our statistics show that the issuance of Panda bonds has become quite active since 2015, with the total issuance volume rising to 132 billion yuan ($19 billion) in 2016. Although the offshore yuan bond issuance volume has declined in recent years from its record of 282 billion yuan in 2014 to 117 billion yuan in 2016, largely due to the lower onshore funding costs, the percentage of bond issuance from international borrowers has continued rising over the past two years, reaching 58 percent in 2016, up from 55 percent in 2015. Overall, we believe the further opening up of the domestic bond market over the past year will not only help in expanding the Panda bond market further, but also in strengthening the integration and connection between the offshore and onshore yuan bond markets. This will help the offshore yuan bond market to maintain its vitality and allow both markets to become major B&R financing channels.  

As of 2017, only 11 countries along the B&R route have seen issuance of Panda bonds or dim sum bonds from their institutions or corporations. Apparently, financing uses of the Panda and dim sum bond markets by B&R countries are still very limited. This signifies great potential for future expansion, an opportunity that Hong Kong's financial firms can seize. We believe the two yuan bond markets will attract more B&R issuers for fundraising in the future, thus allowing the financial resources for B&R development to be more diversified and market-based.

The author is head of Fixed Income Research and managing director at Bank of China International. bizopinion@globaltimes.com.cn

Newspaper headline: Belt and Road set to stimulate demand for financing

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