Protests Add Woes to Formosa Debt as Dim Sum Booms: China Credit

Protests against closer economic ties with China are threatening to condemn Taiwan’s offshore-yuan debt market to another year in the shadow of Hong Kong’s Dim Sum bonds.

About 1.5 billion yuan ($242 million) of Formosa notes were sold in Taiwan this year, 1 percent of total offshore renminbi debt issuance of 162 billion yuan, data compiled by Bloomberg show. Only nine of the 15 bonds sold in the market’s debut year traded in the secondary market in the first two months of 2014, according to GreTai Securities Market, the main exchange. A trade pact that would open up the services sector between China and Taiwan has been stalled amid violent clashes.

Taiwan’s yuan debt market has a long way to go to meet the exchange’s target of at least 12 billion yuan in issuance in 2014, even as holdings of China’s currency on the island more than doubled from six months earlier to 247 billion yuan on Feb. 28. Thousands of protesters clashed with riot police removing them from a sit-in at cabinet offices this week amid fears China would use closer economic ties to assert political control on the island, which it considers part of its territory.

“There’s been little demand from the market because interest rates aren’t that appealing compared with Dim Sum bonds,” said Louis Mao, a Taipei-based fund manager at Yuanta Securities Investment Trust Co., which oversees NT$294 billion ($9.6 billion) and doesn’t hold any Formosa debt. “The services pact would increase the need for yuan funding in Taiwan as more firms expand operations into China.”

Yield Spread

At 1.61 percent, the 10-year sovereign yield on Taiwan dollar bonds is the world’s fifth-lowest, making borrowing especially cheap. The discount for the benchmark against that of China’s government widened 63 basis points in the past year to 291 basis points yesterday. Taiwan’s central bank has kept its benchmark discount rate at 1.875 percent since June 2011, the longest-ever period without a change.

Yuan bonds in Taiwan have lower yields than those in Hong Kong. The Export-Import Bank of Korea sold 10-year Formosa bonds at 4.5 percent in January, compared with a yield of 4.988 percent on similar-maturity Dim Sum bonds at the time.

Global offshore yuan bond issuance has surged 97 percent this year even as the average yield climbed 30 basis points to 4.36 percent, an HSBC Holdings Plc index showed. Dim Sum debt sales may rise past 500 billion yuan for the first time this year, according to HSBC, the top-ranked underwriter.

Services Pact

Yuan note sales in Taiwan will be boosted by the passage of the services pact, which will facilitate remittances of the currency to free-trade zones in China, said Soushan Wu, chairman of GreTai Securities. After 10.6 billion yuan of sales last year, the exchange is aiming at issuance of 12 billion yuan to 16 billion yuan in 2014. About half of this year’s offerings will come from Chinese banks while the rest will be sold by Taiwan firms with businesses on the mainland, Wu added.

The China-Taiwan agreement signed in August would open as many as 80 service industries including banking, brokerages and e-commerce to competition across the Taiwan Strait.

The deal could lead to China getting control of more than half of the island’s banking industry, opposition Democratic Progressive Party Chairman Su Tseng-chang said on March 20. Student protesters accuse President Ma Ying-jeou of fast-tracking the agreement and failing to address their concerns. While the government supports a detailed review, the pact can’t be retracted because it is good for “our efforts to become a free market,” Premier Jiang Yi-huah said on March 22.

1,000 Missiles

The troubles reflect a growing skepticism over greater economic integration with China, which has kept more than 1,000 missiles pointed at Taiwan in demonstration of its resolve for eventual unification. China and Taiwan have been governed separately since Chiang Kai-shek’s Nationalists decamped to the island during a civil war. Though China became Taiwan’s largest trade partner more than a decade ago and direct flights between the territories began in 2008, the two have never signed a peace treaty or negotiated a truce.

Wang Yu-chi, minister of Taiwan’s Mainland Affairs Council, traveled to Shanghai in February and met with Zhang Zhijun, minister of China’s Taiwan Affairs Office, marking the first official cross-strait contact in 65 years. President Ma has deepened Taiwan’s financial ties with China, which include a yuan-clearing agreement signed August 2012 that paved the way for the island taking yuan deposits and selling Formosa notes.

Limited Options

Taiwan’s financial regulator has so far restricted the type of Chinese issuers and capped their sales at a total of 10 billion yuan, just 67 percent of which has been used. Two calls and an e-mail to the Financial Supervisory Commission’s Securities and Futures Bureau didn’t draw a response yesterday.

The current quota may limit options for the six mainland banks, including policy lender China Development Bank Corp. and Bank of China Ltd., that have expressed interest this year in offering Formosa debt. China Construction Bank Corp., Bank of China Ltd. and Agricultural Bank of China Ltd. are among those that have issued yuan debt in Taiwan.

While Chinese banks have a strong demand for funding that Taiwan’s large yuan pool can fulfill, local regulations remain an obstacle, according to Becky Liu, a Hong Kong-based rates strategist at Standard Chartered Plc.

The Chinese banks that “do have the genuine need are unable to issue, or unable to issue more” because of regulations, Liu said. Also, demand for yuan among Taiwanese lenders won’t increase until they hold more yuan assets such as trade-financing loans, she said.

Competition Intensifies

China has pledged support for offshore yuan hubs in a push to enlarge the currency’s role in global trade and finance. Competition for yuan business has intensified, with London and Singapore selling Dim Sum notes. The U.K. and Singapore have both signed deals with China to start direct foreign-exchange trading and arrange currency swaps.

While the yuan has gained 8.9 percent in the last three years, its appreciation has paused as the Chinese central bank allowed the currency to decline to discourage one-way appreciation bets. The yuan and Taiwan’s dollar have been Asia’s two worst-performing currencies in the past three months, dropping 2.2 percent and 1.8 percent, respectively, on signs economic growth on the mainland is slowing.

Yields on Formosa bonds need to be high enough relative to similar debt in Hong Kong’s Dim Sum market in order to compensate for low liquidity, said Vincent Wu, Taipei-based chief investment officer at the fixed-income department of Fuh Hwa Securities Investment Trust Co., which manages NT$179 billion of assets. He said he has bought just one of the Formosa offerings, which he didn’t name, so far for his yuan bond fund.

“The Dim Sum market still gives more investment choices,” Wu said. “For the previous issues in Taiwan’s yuan market, interest rates were still slightly lower than those in Hong Kong.”

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