Who Will Be Lord of the Renminbi?
Renminbi trading is taking off in Taiwan, and bankers are pushing the envelope to get in the game, vying for access to the pockets of Taiwanese businesses. What are the three decisive battle fronts?
Who Will Be Lord of the Renminbi?By Yi-Shan Chen
From CommonWealth Magazine (vol. 521 )
Three years ago, when SinoPac Securities senior vice president and head of fixed income Leon Huang received orders to set up a Hong Kong fund management office, he "furtively" converted a portion of the cash SinoPac Securities had on hand into renminbi, loathe to attract public attention as the "shadow of the unrelenting adversarial cross-strait relationship remained."
"At the time it was hard to imagine Taiwan would ever liberalize renminbi [trading]," he says. What he sank that cash into were so-called "dim sum bonds" (renminbi-denominated bonds issued in Hong Kong) from the Asian Development Bank, thus pioneering Taiwanese financial institutions' involvement in the dim sum bond market.
In November of the following year, SinoPac Securities collaborated with a subsidiary of Industrial and Commercial Bank of China (ICBC) to underwrite a dim sum bond issue from YFY Cayman, a unit of Yuen Foong Yu Paper Manufacturing Inc., opening the door to further cooperative ventures with ICBC.
This past March, Chinatrust came knocking, looking to answer the government call for the issuance of "Formosa bonds" – non-New Taiwan dollar-denominated bonds issued in Taiwan. Within a month, Huang had gathered a consortium of securities institutions to underwrite Taiwan's first-ever renminbi-denominated Formosa bond issue. The 1 billion renminbi issue was oversubscribed.
"We were in the right place at the right time," Huang says modestly. "I was initially intrigued that I could play a market that until then didn't exist."
To date, SinoPac Securities remains the sole Taiwanese financial institution to have underwritten both dim sum bonds and Formosa bonds. Shortly after the Formosa bond issue, ICBC announced that it was acquiring a 20 percent stake in Bank SinoPac, the first Chinese bank to acquire a stake in a Taiwanese bank under newly relaxed regulations.
From dim sum bonds, Formosa bonds and even greater equity participation, it would appear the sky's the limit for the renminbi trade in Taiwan. Who, then, shall become the new lords of the Chinese currency?
Battleground 1: Taiwanese Companies in China
On the surface it appears that a number of banks have been going all in to drum up their consumer renminbi-based business over the past three months. The reality is that banks are more concerned with how to get Taiwanese businesses operating in China to deposit their renminbi-backed holdings with them.
Who is best placed to assist Taiwanese companies in China with money management?
Much of the internal discussion recently at Fubon Financial Holding Co., Ltd. has focused on how to best take advantage of their China market presence – the group's banner includes Fubon Bank Hong Kong, First Sino Bank, Xiamen City Commercial Bank, and Guilin Bank – to handle cash for Taiwanese companies there.
As Fubon Financial Holding director and president Victor Kung observes, with most restrictions on account settlements related to China trade having been lifted, many Taiwanese companies with cross-strait operations have become adept in this niche, borrowing relatively cheap funds in Taiwan, converting them to U.S. dollars and depositing the U.S. dollars into Chinese banks to earn on the rate spread at both ends.
Previously, no Taiwanese banks had a presence in China, so once they made a loan to a Taiwanese company operating in China, the company would immediately deposit the funds in another bank. Henceforth, the focus will be on how to best achieve a cross-strait presence and be a player in the capital flows along the supply chains of Taiwanese companies.
"Cash management will be an area that our forces must contest," Huang says.
Going back at least to its 2004 acquisition of International Bank of Asia, Taipei's Fubon Bank has had a plan in place to use Hong Kong as a training ground to bring its own people up to speed in renminbi markets, particularly as regards Taiwanese companies. Of the workforce at Fubon Bank's Hong Kong branch, half are local hires, and half were sent from Taiwan.
Mega Holdings chairman Joseph Tsai has a similar aim to turn Mega Bank into a commercial trading account clearinghouse.
Battleground 2: Tailor-Made Products
Tsai has three principles when it comes to conducting renminbi-based business: (1) What comes in must go out: an avenue for renminbi-denominated investments must be found prior to accepting deposits. (2) Do nothing with a rate spread of less than two percent. And (3) flow must be greater than stock. Consequently, Mega is directing particular focus at cross-border renminbi trade settlement and the bank transfer business. With its advantageous position as a designated clearing and settlement bank, Mega Commercial Bank holds some 9.1 billion renminbi in interbank renminbi deposits, the highest of any Taiwanese bank.
Right now, Taiwanese renminbi trade remains in the first stages of attracting funds. Yet once sufficient reserves of renminbi deposits accumulate, the next pivotal question for financial institutions will be: Who can provide sound financial products?
Lin Lung-cheng, E. Sun Bank's vice president for corporate finance and head of the bank's renminbi working group, believes that the Chinese currency will continue to appreciate and that the primary focus in the current stage should be the wealth management business. If banks offer sound products with high returns, finding takers will not be a problem. In mid-March, E. Sun launched a structured instrument that would pay investors a return of up to eight percent, provided that the exchange rate for the Chinese currency breached a certain level. Within a week, 140 million renminbi worth had been sold.
"But the key for the bank in getting its hands on this money is that it must first have a good idea where the funds will be subsequently invested," Lin says.
Cosmas Lu, managing director of Barclay's Bank Taiwan, believes there are most certainly numerous Taiwanese investors that need custom-designed renminbi-denominated instruments.
For example, Taiwanese insurers are larger than their Hong Kong counterparts and require large volumes of long-term bonds. The maturity dates for dim sum bonds currently on offer are all quite short.
"A lot of the 10-year and 15-year Hong Kong bonds are bought by Taiwanese insurers," Lin says, adding that Taiwanese investors also prefer protecting their principal to earning high interest.
The strength of the market for renminbi-denominated Formosa bonds will be one of the key barometers in the success of Taiwan's renminbi capital markets.
Chi-Hsien Lee, president of GreTai Securities Market, which runs Taiwan's bond trading market, notes that the high degree of cross-strait trade and investment interdependence means there's no shortage of supply or demand for renminbi-denominated financing.
Battleground 3: The Formosa Bond Market
For this year, the tentative target is to have five renminbi-denominated Formosa bond issues in Taiwan. The Chinatrust issue has already listed and the Deutsche Bank issue has received regulatory approval. Meanwhile, Chang Hwa Bank has filed with the Financial Supervisory Commission for authorization to issue its own. With the Teco Electric and Machinery Co. board of directors' recent approval of a Formosa bond issue, that target looks eminently attainable.
"The issuance costs and capital costs are both lower in Taiwan than in Hong Kong, so the Formosa bond market does have its advantages," Lee says. "What's more, capital flows into and out of Taiwan are regulated through the central bank so there is relatively less risk of currency speculation. That will help to assuage Chinese concerns in negotiations over renminbi repatriation matters."
Chinatrust's three-year Formosa bond, for example, yields 2.9 percent, just two to six basis points lower than similarly rated dim sum bonds.
In contrast to the optimism of those creating the market, a number of financiers with extensive experience in the dim sum bond market are taking a cautious approach.
Take Deutsche Bank's tentative, as-yet-unlisted Formosa bond issue, for example. Deutsche Bank was willing to pay a yield of only 2.3 percent while local underwriter Bank SinoPac insisted on a yield of 2.5 percent, an impasse that has to date stalled what would have been the first Formosa bond issue to be available to small, individual investors.
"They're running a game on Taiwan," says one exasperated exec involved in the underwriting.
If the eventual yield on the Deutsche Bank Formosa bond issue tends toward the lower end of that spectrum, it would indicate that Formosa bonds will only be able to compete with dim sum bonds on the basis of lower issuance costs – not an appealing scenario for Taiwan.
"Taiwan will have to change a lot of regulations if it is to compete with dim sum bonds," says SinoPac Securities' Leon Huang. Under current regulations, Taiwan still restricts who may issue bonds. For example, overseas subsidiaries of companies listed on domestic stock markets may not issue bonds.
Additionally, foreign nationals wishing to buy Formosa bonds must first receive authorization from both the Financial Supervisory Commission and the central bank while the bond-issuing company must prepay 15 percent of the taxes to be owed by foreign investors. The end result smacks of an unwillingness to sell Formosa bonds to foreigners.
Bond Market Drawbacks, Regulatory Impediments
Lastly, Taiwan's clearing and settlement system is not linked to international mechanisms, which also does nothing to encourage foreign participation in the Formosa bond market.
"If Formosa bonds can attract international issuers, then investment risks can be better dispersed," says Barclay's Cosmas Lu. Foreign issuers have relatively more diversified uses for their renminbi holdings, which could help alleviate some of Taiwan's risk of over-investment in China.
While GreTai president Chi-Hsien Lee candidly acknowledges some definite shortcomings in Taiwan's bond market, he says GreTai is in talks with the Financial Supervisory Commission on how to address them. Issuance procedures are to be simplified and, in terms of ratings supervision, Formosa bonds sold to institutional investors will no longer require a credit rating. Down the road, regulations on overseas subsidiaries of locally listed companies are also likely to be relaxed, allowing them to return to Taiwan and issue bonds.
"We've also requested that the Financial Supervisory Commission recommend that the Ministry of Finance consider reducing the tax on foreign investor bond yields from 15 percent to 10 percent, the same rate as Taiwanese nationals," Lee says, although he acknowledges the great difficulty of cutting taxes, given the country's current fiscal picture.
The speed with which these impediments can be removed will certainly impact the pace of "keeping the money and the talent in Taiwan."
Translated from the Chinese by Brian Kennedy