Taiwan lures renminbi issuers

Fri Jun 7, 2013 7:09am EDT

Related Topics

* Deutsche becomes first foreigner to raise renminbi in Taiwan

* Bank gets lower rate than it would on Dim Sum bonds

* Fast-growing deposit base prompts search for more issuers

By Nethelie Wong

June 7 (IFR) - Taiwan's efforts to promote itself as an offshore renminbi hub received a boost this week when Deutsche Bank became the first foreign financial institution to target bond investors there with a issue in the Chinese currency.

The Rmb1.1bn (US$175m) Bao Dao bond - named after the Chinese for "treasure island", a popular reference for Taiwan - comes less than four months after Taiwanese banks began accepting renminbi deposits.

Bankers said the depth of local demand meant several foreign issues were likely to follow as the island steps up its push to compete with Hong Kong as a funding centre for the Chinese currency.

"This transaction reflects the strong demand for renminbi assets in Taiwan, and points to significant potential for the growth of this market. We are confident that we will be the first of many international issuers that come to Taiwan seeking renminbi financing," said Cynthia Chan, Deutsche's head of global markets for Taiwan.

The German bank printed a Rmb1bn three-year at 2.45% and a Rmb100m five-year non-call one at 2.65%. Both tranches were priced near the high-ends of initial indications of 1.5%-2.5% for the three-year and 1.7%-2.7% for the five-year.

The levels, however, were cheaper than those that other issuers have achieved on recent deals in the more liquid Dim Sum market. For instance, Agricultural Bank of China Singapore branch priced on Tuesday a Rmb200m three-year CD at 2.9%, or a yield 45bp higher.

Deutsche's success may encourage other foreign issuers to tap the Taiwanese market for the arbitrage opportunities available from cheap renminbi funding.

With no restrictions on taking the proceeds overseas, the renminbi it raised at 2.45% could be used to fund trade finance elsewhere at much higher rates.

The arbitrage comes from tapping a captive retail investor base, where individual savers have limited ability to invest in foreign bonds and few other options for their renminbi deposits.

Local banks only pay 1.1% to 2.8% per annum on time deposits, and that interest income is subject to tax. Retail investors do not pay tax on Bao Dao bond investments.

A withholding tax of up to 17% on overseas institutional investors also keeps out foreigners, creating a gap in yields between the Taiwanese and other offshore renminbi markets.

It was no wonder, therefore, that Deutsche's bond came with a very low minimum denomination of Rmb10,000, targeting the local retail base.

The ability to raise cheaper renminbi from retail investors is one of the draws that may attract more foreign issuers to Taiwan and, as a result, help it become a more important centre for the currency. However, it has also already attracted criticism from some local players that it may siphon liquidity away from the local market.

"It's like an ATM machine. You draw money from it, but use it somewhere else," said a local banker.

RAPID GROWTH

Taiwan put the regulation in place to accept renminbi deposits in February, at the same time as it started clearing the Chinese currency. Since then, renminbi deposits in Taiwan have grown from zero to Rmb60bn, making it the third largest liquidity base for the currency outside of China within less than four months.

Deutsche estimates that Taiwan's renminbi deposit base will grow to Rmb100bn at the end of 2013, and to Rmb200bn in the next two to three years, with the support of both corporate and institutional and retail investors.

Analysts predicted that, come 2018, the deposit base would reach Rmb600bn, or about 10% of the NT$33trn (US$1trn) of total deposits in Taiwan at the end of 2012.

To create investment opportunities for that growing liquidity pool, bankers believe Taiwan will remain keen to welcome foreign issuers entering to build up the local market.

For companies that have already established a track record in Formosa bonds - foreign currency bonds in Taiwan's local market - the approval process is relatively quick.

Deutsche, for instance, received approval from the Financial Supervisory Commission, Taiwan's securities regulator, to issue up to Rmb2bn of Bao Dao bonds in March, only a couple of weeks after local renminbi deposits were first allowed. The talk among bankers now, is that several other foreign issuers are lining up to follow Deutsche's lead. (Reporting By Nethelie Wong; editing by Christopher Langner and Steve Garton)

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