Wealthy Nations Daily Update - Sino-UK Ties

The President of the People’s Republic of China, Xi Jinping, will be visiting the UK next week in what has been hailed the “Golden decade” of Sino-UK ties. On the top of his agenda will be the announcement that China is to pick London as the first offshore renminbi trading hub outside of Asia; London is already the third largest clearing hub for redback transactions, behind Hong Kong and Singapore.

In a push to further internationalise the renminbi, the People’s Bank of China (PBoC) is looking to issue Chinese Treasury bonds denominated in renminbi in London. An official close to Mr. Xi said that the intention is not so much to raise funds, but to establish an offshore debt market for the first time. Not much is known about the deal as yet, however according to the Financial Times, “officials said that a few billion renminbi in short-term PBoC notes were likely to be the first move...Once such issues have prepared the market and won a reputation among investors, Beijing’s first offshore Treasury bonds are set to be queued for launch”. Reuters has reported that the PBoC “is expected to issue up to 5 billion yuan of one-year bills in London soon”.

Earlier this week, the Agricultural Bank of China (ABC), one of the country's “Big Four” lenders, issued the country’s banking sector’s first ever “green bond”, in London. Rated A1/A the multi-tranche debut issues totalling USD1bn included: a 2.125% three-year USD 400m bond issued at +120 basis points over Treasuries, a USD 500m 2.75% five-year note at +140 and a RMB600m two-year bond issued at a yield of 4.15%. The issues are to be listed on the London Stock Exchange and proceeds will fund climate change efforts, an area of immense importance to China.

At the time of writing, the five-year note is trading at a spread of 134 basis points over, our model calculates fair value is at 97 basis points which would suggest a 1.75 point increase in price to fair value, or +1.7%. Although the prospect of such issues is very exciting for a market that has been pretty light on new issuance, we currently find better value elsewhere.

Infrastructure investment in nuclear power and the HS2 high speed rail line will be also be discussed during President Xi’s visit. It has been reported that Xi and his crew are upbeat about the upcoming trip, let’s hope organisers get the correct length of red carpet this time round.