HSBC Shuns Formosa Debut as Taiwan Funds Cut Yield: China Credit

Taiwanese investors accepted such a low yield on the first yuan bonds sold on the island that global funds including HSBC Global Asset Management stayed away.

Chinatrust Commercial Bank, a unit of Taiwan’s fourth-biggest lender by market value, sold 1 billion yuan ($161 million) of three-year notes at 2.9 percent on Feb. 25. The yield on the debt, a class dubbed Formosa bonds to be regulated by the island’s government, compares with the 3.35 percent on similar-maturity Royal Bank of Scotland Group Plc yuan paper in Hong Kong. Both lenders are rated A by Standard & Poor’s.

“For global investors who already have access to the Dim Sum bond market, Formosa bonds lack appeal,” said Steven Huang, a Taipei-based fund manager at HSBC Global, which manages $417 billion of assets worldwide. “With Taiwan’s existing low-yield environment, local banks and securities firms are happy to buy anything that has better returns than Taiwan dollar bonds.”

The debut yuan sale follows an August pact on cross-strait currency clearing with China’s central bank, which allowed the island’s lenders to offer yuan deposits onshore from Feb. 6 and compete with rivals in Hong Kong, Singapore and London for a share of renminbi business. Taiwan’s 1.21 percent 10-year sovereign yield is the lowest in the world after 0.68 percent in Japan and 0.72 percent in Switzerland, supporting demand for debt with higher interest rates among managers of the island’s NT$34 trillion ($1.15 trillion) in savings.

Trade Volume

“The Taiwanese were very enthusiastic about the renminbi when we visited there,” said Steve Wang, Hong Kong-based head of fixed-income research at BOCI Securities Ltd. “Taiwanese banks want to earn some more money and because returns on local-investment products are so poor they always look overseas. They are very familiar with the China market and want to expand in China using the offshore yuan as an advantage.”

A lack of secondary-market transactions will make Formosa bonds unappealing to more active investors, according to Eastspring Securities Investment Trust Co. Some NT$477 billion of bonds were traded on the island in January, compared with 6.97 trillion yuan in China, according to data from Gretai Securities Market and Chinabond.

“Apart from the low yields, Formosa bonds’ low liquidities will be a problem for us,” said Yichun Shi, who helps manage NT$109 billion of assets as a Taipei-based portfolio manager at Eastspring. “It makes buying and selling very difficult for portfolio managers.”

Issuance Planned

Activity may improve as global banks get involved. BNP Paribas SA and Deutsche Bank AG have approached Taiwan’s Financial Supervisory Commission about possible renminbi offers, according to two people familiar with the matter, who asked not to be identified because the details are private. Companies including China Construction Bank Corp. and HSBC Holdings Plc have listed yuan-denominated debt in London.

Chinatrust’s Formosa bonds yield 173 basis points more than its local dollar notes with a similar maturity. They will start trading on the Gretai Securities Market in Taipei on March 12 and the funds raised will be used for the bank’s loan operations and to replenish mid- to long-term liquidity, according to a statement from Chinatrust Financial Holding Co. Taiwan Depository & Clearing Corp. will be responsible for payments and settlements for the notes, according to its website. The renminbi is the official name of China’s currency and the yuan is the largest denomination.

Locals Keen

Renminbi deposits at Taiwanese lenders’ domestic and offshore units jumped more than threefold to 31 billion yuan as of Feb. 22 from a year ago, while savings of the currency at Hong Kong banks totaled 603 billion yuan at the end of 2012, according to central bank data.

To tap that money, HSBC Global is planning to sell a yuan-denominated bond fund in Taiwan in the first half of 2013 investing in Dim Sum bonds, adding to its existing Taiwan dollar-denominated yuan debt fund, according to Huang.

Yuan securities in Taiwan will get a boost as insurers will be allowed to invest in foreign-currency notes listed on the island, Yu-Chiung Tzeng, director general of the Financial Supervisory Commission’s Insurance Bureau, said yesterday.

Insurers invested around one-third of their portfolios in local fixed-income products last year, according to the Taiwan Insurance Institute.

Yuan Appreciation

A 15 percent rally in the Chinese currency in the past five years outstripped a 4 percent advance in the Taiwan dollar, according to data compiled by Bloomberg. The yuan will appreciate 1.9 percent to 6.11 per dollar by the end of 2013, according to the median estimate of economists in a Bloomberg survey. The Taiwan dollar is forecast to strengthen 3.3 percent.

The yuan in Taiwan has traded in line with its Hong Kong counterpart since the first day of trading on Feb. 6. The currency gained 0.06 percent to 6.2253 as of 12:35 p.m. local time, according to Taipei Forex Inc. In Hong Kong’s offshore market, it rose 0.07 percent to 6.225, while it climbed 0.04 percent to 6.2269 in Shanghai.

China’s benchmark 10-year government bond yield slipped one basis point this month to 3.60 percent yesterday, according to data from Chinabond. It reached this year’s high of 3.61 percent on Jan. 29.

The cost of insuring China’s debt against non-payment with credit-default swaps contracts has fallen three basis points to 66 this month, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. It is down from as high as 146 in June 2012. The indexes typically fall as investor confidence improves and rise as it deteriorates.

International Competition

The People’s Bank of China approved the Singapore branch of the Industrial & Commercial Bank of China Ltd. this month as the clearing bank in the city state, making it the third offshore yuan center after Hong Kong and Taiwan.

“Valuation and market liquidity in Taiwan’s yuan market, as compared to other opportunities in Hong Kong, are important investment considerations,” said Angus Hui, a fixed-income fund manager at Schroder Investment Management Ltd. in Hong Kong. “In medium term, we view it as one offshore market, no matter the financing and investment activities are centered in Hong Kong, Taiwan, Singapore or London.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE