What's next for China's offshore renminbi market

NDRC initially approved a quota of Rmb25 billion total of offshore renminbi bonds by non-financial issuers. NDRC approval includes several requirements, such as that the renminbi funding be kept offshore.

It approved five SOE issuers, including Baosteel, Huaneng Power, China Datang, China Minmetals and Guangdong Nuclear Power Corporation.

SAFE registration

But the riskiest aspect of Chinese SOE offshore renminbi bonds is the requirement to register bonds with China's State Administration of Foreign Exchange (SAFE) post-pricing. Registration with SAFE is required to ensure that the company can pay interest in principal offshore during the tenor of the bonds.

Bonds by onshore Chinese companies cannot include guarantees without SAFE approval. To avoid the lengthy approval process, Chinese issuers frequently circumvent the requirement. Some offerings, such as Hainan Airlines' recent issuance, include a standby letter of credit from an onshore Chinese bank.

Real estate companies in the high-yield space issue bonds from offshore entities that receive credit enhancement under keepwell agreements. However it is unclear whether keepwell agreements would be enforceable in a default scenario.

Heng added that counsel must structure the transaction taking into account the regulatory risks such as the registration of the bond issuance with SAFE, which can only take place after settlement.

She noted that in the first few deals, issuers have been required to place the bond proceeds offshore in escrow to be released following issue of the SAFE registration certificate.

“In recent transactions, however, investors seem to have become comfortable with the use of a put option instead,” she added.

What to expect

IFLR's sister publication Asiamoney reported that the NDRC is expected to expand quotas for Chinese SOEs to sell debt in the offshore renminbi market this year. This will help Chinese SOEs meet funding demand, and also signals another step in the internationalisation of the renminbi.

However the development of the market also depends on pricing.

Heng noted that the volume of issuance in the offshore renminbi market has dropped relative to the last two years. However she added that certain high-grade Chinese issuers, such as policy banks, have continued to issue significant amounts of renminbi bonds offshore. These include China Development Bank, Agricultural Bank of China and other state-owned and policy banks.

“As investors become more discerning with the credit of the issuers, issuers are also thinking harder whether the pricing makes sense before they tap the offshore renminbi market,” she added.

This article first appeared in China Law & Practice's sister publication IFLR.

By Ashley Lee

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