KfW may have sold the first Frankfurt-listed Chinese renminbi bond this week, but some market watchers say the Triple A rated issuer’s new sale is a long way off from providing the impetus for a larger shift in Dim Sum market dynamics.
Germany’s largest promotional bank is supporting the recent initiative to promote Frankfurt as a financial centre for renminbi, which is backed by several parties both in politics and the wider economy.
And it was an all-German affair, with Deutsche Bank along with Commerzbank appointed as lead managers.
Horst Seissinger, head of capital markets at KfW, said: “This is an important political statement, it is important for KfW and it is important for Deutsche Bank and Commerzbank.”
But some market watchers are far from convinced by the offshore renminbi hub race, in the form of Europe-targeted Dim Sum bonds.
“Let’s get real. Renminbi exists in Asia, it is a local currency,” said one market participant, adding that the deal was likely done for publicity.
The new bond came on the back of the Bundesbank and the People’s Bank of China signing an agreement back in March allowing the clearing and settlement of renminbi trades in Frankfurt, making the city the first hub for the clearance and settlement of such payments in continental Europe. The bond will be cleared via Clearstream Banking AG in Frankfurt.
KfW said discussions with global investors over recent months had shown that there is an increased interest in investing in renminbi and that its importance as a reserve currency will increase over the coming years.
The promotional bank intends to issue more renminbi bonds listed in Frankfurt, given a favourable market environment and investor demand.
The new Rmb1bn (€120m) May 2016 bond priced with a yield of 1.375%, in line with guidance of 1.375% area.
One market watcher said that it was expensive for investors, coming considerably through corresponding Chinese government bonds. The 2.87% 2016 Chinese government bond trades around 2.23%, while the 1.4% 2016s are around 2.28% and the 2.6% 2016s at 2.34%, he said.
“Asset swap buyers would have picked up on this opportunity, as it gives them an attractive spread on KfW,” he said, adding that the renminbi bond offers a pick-up of around 5bp-6bp over KfW’s two-year dollar benchmark.
KfW said the cost of funding was in line with what it can achieve in euros.
Leads said investor demand came from a global pool and included interest from institutional investors and central banks, as well as from cash-rich German corporates looking to park renminbi liquidity in Germany.
“In light of the hunt for yield, investors are interested because they need to diversity and the RMB market offers an attractive asset class they can tap into,” said Dirk Schmitz, co-head of corporate banking and securities, Germany, at Deutsche Bank.
Despite the criticism, all things need to start somewhere and this rudimentary market needs to have time to develop.
“We hope to incentivise other issuers to follow in the footsteps of KfW and take a closer look at this market,” said Seissinger, adding that he would expect to see German regional and corporate issuers and other financial institutions with a link to the region starting to look at the sector.
“In 10 years we may be having a different discussion,” said one market participant, although he remained unconvinced that the new bond is the impetus for a larger shift in dynamics.
Bankers who worked on the new deal, however, were optimistic.
“Frankfurt will be the offshore clearing centre in the eurozone. This will make it much easier for the German real economy to clear and settle payments denominated in renminbi, marking a major step forward in intensifying Germany’s economic relations with China,” said Schmitz.