Sovereign RMB bonds—the shape of things to come?

Will other western nations follow the UK’s lead and issue sovereign bonds in the renminbi (RMB)? Andrew Bliss, partner at King & Wood Mallesons, considers what the UK’s issuance means for the future of the RMB in the international capital market.

Original news

The UK has become the first ever western government to issue a sovereign bond in the RMB, China’s currency. The bond is worth RMB 3bn, equivalent to approximately £300m, has a maturity of three years and is the largest ever non-Chinese RMB to be successfully issued.

This is the first sovereign bond issue in RMB in the west by a non-Chinese issuer. How significant is this for the financial markets?

The recent issue of a bond by HM Treasury on behalf of the UK government is a significant further step in the internationalisation of the RMB. The offshore RMB debt market has grown extremely rapidly in recent years. Outstanding offshore RMB bonds and certificates of deposit reached approximately RMB 634bn by February 2014, having increased from almost zero only four years ago. The issuance, while not in itself a large increase, is a symbolic step both in terms of the issuance of RMB bonds by a sovereign issuer and the acceptance of the RMB by the UK government. This transaction should be seen in the context of the active steps taken by HM Treasury to try and ensure that London is seen as one of the main RMB overseas financial centres.

Is the RMB a freely available currency now?

Capital controls have been in place since the founding of the People’s Republic of China in 1949. However, with the economic liberalisation of the Chinese economy since the 1980s, steps have been taken by the Chinese authorities to ensure that the RMB has been available internationally, both to allow trade in RMB and for capital markets transactions such as this. The enshrining of ‘full convertibility’ in the recently concluded Third Plenum shows the ultimate aim of the Chinese authorities.

How do the payments on the bond work where the issuer's home currency is sterling but the bond is denominated in RMB?

While RMB is not a freely available currency, the obligation remains to pay all amounts of principal and interest in RMB. However, the terms and conditions of the bonds provide that if the UK government determines that the amount payable is not available to it in RMB for reasons beyond its control, or because RMB is not permitted to be used for the settlement of international financial transactions, the issuer may fulfil its payment obligations by making such payments in sterling.

Are sovereign bodies likely to follow by issuing bonds in RMB?

As noted above, the issue by the UK government is in some ways a symbolic gesture. Indeed, the funds raised will be used by the government to fund its foreign currency reserves, rather than being applied to fund the government’s spending deficit. However, given the increasing internationalisation of the RMB, the availability of funds and the desire of investors to diversify their investments—particularly in a generally appreciating currency such as the RMB—it would seem entirely logical that the RMB becomes a far more frequently seen currency in the international capital market.

Are there any legal difficulties that have been overcome to proceed with this issue?

There do not appear to be any specific legal difficulties in issuing RMB denominated bonds, although as noted above, both the availability of RMB and convertibility concerns feature in all such bonds. Such issues are likely to remain until such time as the RMB's capital controls have been removed entirely.

Interviewed by Duncan Wood.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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