RMB Sovereign Bond (Stock Code 86606.hk) Firstly Listed in Hong Kong: PRC Fixed Coupon Rate Asset Analysis

First HK-listed PRC RMB Sovereign Bond

China is going to issue a new round of Renminbi (RMB, CNY, or Yuan) Sovereign Bonds in Hong Kong, Unlike the previous issuances, it is the first time the offshore RMB-denominated Sovereign Bond will be available publicly to international retail investors.

Name of this new stock is 'RMB Sovereign Bond 1407-R' from People's Republic of China (PRC) and its stock code is 86606.hk. Joint coordinators of this CNY IPO (Initial Public Offering) are Bank of China (BOCHK Hong Kong Branch Stock Code: 2388.hk), as well as Hong Kong and Shanghai Banking Corporation (HSBC Stock Codes: HSBA in London, 005.hk in Hong Kong, HBC in New York). Principal investment for each investor is RMB 10K minimum or its integral multiples. Total offer size of IPO is RMB 5.5 billion and, if over-subscription occurs, IPO allocation will be processed through ballot. Source: RMB Sovereign Bond IPO Prospectus By Ministry of Finance (MoF) from PRC.

Now you can find our detailed PRC RMB Sovereign Bond analysis report as below:

(1) Previously offshore CNY Sovereign Bonds were not listed on any stock exchange. They have been named as a kind of 'dim-sum bonds' in HKSAR (Hong Kong Special Administration Region) because they were only available for HK individual residents with HKID (Hong Kong Identity Cards) via retail counters, or for institutional investors via bond-tendering platform called CMU (Central Moneymarkets Unit) Services run by HKMA (Hong Kong Monetary Authority). This time, after IPO subscription period which is also available only to HK residents, international investors can invest in the PRC RMB Sovereign Bond because it will be listed on Hong Kong Stock Exchange (SEHK Stock Code: 388.hk) on July 20, 2012. Therefore this will be a golden chance for international retail investors who are longing to purchase RMB-denominated fixed rate assets in secondary market from People's Republic of China (PRC) government.

(2) Dividend Policy: This issuance (Stock Code: 86606.hk) will have dividends paid at a fixed annual coupon rate of 2.38% due 2014 by the Chinese Ministry of Finance (MoF) and maturity date will be July 19, 2014. Interest coupons will be paid and distributed to bondholders on January 19 and July 19 semiannually for each year.
(3) Investment Risks: This bond has direct, unsubordinated and unsecured obligations of PRC central government. Bondholders are eligible for ranking equivalent to all other creditors whose claims are not subordinated, not preferred, not secured by law. Due to its high legal ranking, it is generally believed that investment risks of this CNY Sovereign Bond can be considered low.

(4) Usage of IPO Proceeds: Net proceeds of this IPO will be used for generic government expenses by the PRC Ministry of Finance (MoF).

PRC RMB Sovereign Bond Analysis Conclusion

No doubt we would recommend a buy for this RMB Sovereign Bond (Stock Code: 86606.hk) if you can buy it in the primary market. Although its investment return is relatively low, it can be used as a safe heaven in your investment portfolio owing to its low risks.

Of course you need to consider about cost-effectiveness if you are international retail investors or you need to buy it in secondary market.

In fact, apart from these RMB 5.5 billion retail sovereign bonds, this time Chinese Ministry of Finance (MoF) also offered RMB 2 billion sovereign bonds to five foreign central banks via special placement, the first time ever. This has made Hong Kong the first offshore financial centre to allocate CNY sovereign bonds to overseas central banks or monetary authorities outside the mainland China which intend to hold fixed coupon rate and RMB-denominated sovereign-debts as one of their key reserve currencies.

In addition to the above RMB 7.5 billion issuances, another RMB 15.5 billion sovereign bonds with maturities ranging from 3 up to 15 years (including RMB 7 billion for 3-year maturity, 5.5 billion for 5-year, 1 billion for 7-year, 1 billion for 10-year, and 1 billion for 15-year) had also been allocated to institutional investors via CMU run by HKMA. As a result, total issuance size of this batch of offshore PRC sovereign bonds hit a record high level of RMB 23 billion in Hong Kong.

Chinese authorities widely recognize this round of PRC debt issuance (Stock Code: 86606.hk) as a financial gift to cerebrate the 15th anniversary for Hong Kong's sovereign return to the mainland China since 1997. Although the bond issuance can help boosting the offshore CNY market in HK, it should not be regarded as a one-way gift to HKSAR because it can also benefit the mainland China through promoting the pace of RMB internationalization.


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