Long constrained by stringent currency controls, China’s offshore debt market is still in its infancy. Various levels of government in China, state-owned enterprises and foreign companies such as Volkswagen and Caterpillar have so far issued bonds denominated in yuan. British Columbia could soon be the first foreign government to dive into so-called dim sum bonds.
The province is considering an issue of at least 500 million yuan, or $80 million. The finance ministry says the move is part of a long-term strategy to diversify its investor base and fortify economic ties with China.
The small size of the issue suggests B.C.’s aim is to signal to China it has friends in Canada, says Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. “In some ways, the British Columbia government is flirting with the Chinese,” he says. “Are they serious?”
|Expected size of B.C. government bond issue denominated in yuan.|
Dead serious, the province says, as long as the right market conditions exist. China is already a dominant trading partner with B.C. and has a “bright future as a global market choice for issuers,” says Jim Hopkins, assistant deputy minister. “There’s a first-mover advantage by being one of the early entrants.”
B.C.’s experiment is being watched closely by other governments assessing the appetite for dim sum bonds. If completed, the sale could fling open the door to other governments tapping the near US$40-billion market, which is widely viewed as a way for China to internationalize its currency, officially referred to as renminbi.
“This definitely is not flirting. We’re being sincere,” says Hopkins, who in December travelled to Asia for a week-long investor road show. “Diversifying our investor base to include offshore capital markets is something we’ve followed forever. RMB fits that strategy to a T.”
The move will be no quick and easy deal, though. Whether a dim sum bond sale is worthwhile depends on factors including the interest rate differential and the cost of swapping yuan into Canadian dollars. For B.C., which boasts a triple-A credit rating, the ideal situation would be for the Chinese rates to be lower than what it currently pays lenders, in addition to low swap costs.
“The cross-currency swap rates have to be attractive from the point of view of an issuer so they can borrow more cheaply,” says Edmund Harriss, a fund manager at Guinness Atkinson Asset Management in London. On the flip side, a potential buyer is looking for yuan appreciation but also wants to earn a reasonable yield with moderate risk.
Given China’s rise in the world, the dim sum bond market has massive potential, says Douglas Porter, chief economist at BMO Capital Markets in Toronto. “I do think one of the stories over the next 10 years is going to be China’s emergence as a financial power,” he says. “It definitely holds potential for a lot of public-sector borrowers.”