Taiwan Offshore Yuan Market

Taiwan's first yuan debt offerings by four big mainland banks have been snapped up, opening the floodgates for up to 60 billion yuan (HK$76.5 billion) of fundraising as Beijing looks to strengthen the island's role in the drive to internationalise the yuan.

The successful bond sales in Taiwan, which is sitting on a pile of 123 billion of yuan deposits, have whetted mainland firms' appetite for more debt issuance on the island.

Analysts said the size of Formosa bonds could top 60 billion yuan in two to three years as the mainland and Taiwan consolidated their economic ties.

Taiwanese have shown a strong interest in holding yuan assets, attracted by higher interest rates and currency appreciation,” Standard Chartered Bank’s Taipei-based economist Tony Phoo said.

Yuan deposits now account for 17 percent of overall foreign currency deposits, up from 6 percent in February when Taiwan allowed domestic banking units to conduct yuan business, Phoo said.

In Taiwan, the central bank limits the conversion to 20,000 yuan per person per day.

Analysts said the issuances by the four mainland lenders would revive the island's yuan bond market as mainland firms flocked to Taiwan to raise funds because of low borrowing costs there.

Bocom's three-year notes worth 800 million yuan carry an interest rate of 3.4 per cent while its 400 million yuan five-year bonds were offered at an interest rate of 3.7 per cent, far lower than borrowing rates on the mainland.

Taiwan recently added yuan to its foreign exchange settlement system, a move that is set to reduce transaction costs, lower foreign exchange risks and increase local corporates' willingness to switch to yuan for cross-strait trade and investment

A yuan debt craze in Taiwan, however, would not be a threat to Hong Kong's role as the dominant offshore yuan market. Hong Kong's yuan deposits still have a wider access to the mainland market and assets.

Apart from dim sum bonds, yuan assets in Hong Kong can be ploughed into the renminbi qualified foreign institutional investor scheme to invest in mainland equities and bonds.