Just when people started to give up on Hong Kong's relevance as a financial hub, a new breed of money seekers is coming to town.
Local government-affiliated industrial companies have been avid issuers of dim sum bonds, or offshore yuan-denominated notes, lately. Qihe Urban Investment Construction Group, which is involved in infrastructure construction in the northeastern Shandong province, is new to brokers in Hong Kong. But since late September 2023, the entity wholly owned by Qihe County has issued notes totalling 2.4 billion yuan (11.6 billion baht). All have a 7.8% coupon, except for one offering extra credit protection, according to data compiled by Bloomberg.
This new trend raises a curious question: Why would these municipalities come to Hong Kong when financing is much cheaper on the mainland?
Aware of local government financing vehicles' ballooning maturity wall, Beijing, in mid-2023, tiptoed into a programme that allowed troubled provinces to swap some LGFV debt for bonds carrying lower interest rates. As a result, notes issued by more distressed areas rallied. These days, AA-rated LGFVs can refinance more cheaply than the US federal government.
One explanation is that Beijing's LGFV debt resolution is anything but resolute. Last year, these bond swaps amounted to just around 1.5 trillion yuan or about 2% of total off-balance-sheet local government debt. In addition, the weakest regions, such as Guizhou and Tianjin, were given larger quotas to issue special refinancing bonds, thereby leaving others behind. Consequently, many entities still have trouble tapping into China's corporate bond market, while creditors keep on knocking on their doors.
But more importantly, Hong Kong is a lightly regulated market where people can strike customized deals -- away from Beijing's vigilant eye. The "one country, two systems" governing principle is still intact in the Central Business District.
The actual total financing cost of some recent dim sum bonds can double the coupon rate, reported Caixin, using Chongqing Wansheng Industrial Park Development and Construction Co Ltd as an example. In December, Wansheng issued two 7.5% notes worth 583 million yuan, even as it struggles to borrow at 12% from private lenders in mainland China and is shut from the corporate bond market there. To make the dim sum deals happen, Wansheng paid extra and enriched investors' yield, according to Caixin.
Unlike in mainland China, where regulators are quick to crack down on anything remotely unseemly, enhancing total returns is easy to do in Hong Kong. An issuer can simply pay exorbitant investment banking fees, which can then be passed on by brokers to buyers.
Meanwhile, mainland investors, especially hedge funds that now face tighter leverage caps and existential pressure are more than happy to engage. Good assets are hard to find in deflationary China. While LGFV bonds are deemed relatively safe -- there have been no defaults in this space -- the yield compression has been striking. For instance, Tianjin Rail Transit Urban Development Co was able to issue commercial paper at less than 3% late last year versus a 5% coupon a year ago. Hong Kong's juicy dim sum meals are thus irresistible.
Qihe makes a perfect case study for why Chinese local government affiliates are rushing to tap Hong Kong's dim sum market. During the holiday season at the end of last year, intermediaries for Qihe were pitching to brokers in the city, dangling 15% in total returns, according to people familiar.
Money has been tight. As of March 2023, Qihe has already pledged out one-third of its net assets, such as cash and land, for loans. Cash reserves could only cover half of its short-term debt. By November, a major subsidiary of Qihe had accrued overdue commercial bills totalling 618 million yuan; some creditors went to court seeking compensation. This year, Qihe and its subsidiaries have to repay bond investors about 1.2 billion yuan.
In recent months, quite a few bankers bemoaned to me the elevated cost of borrowing in Hong Kong, whose currency is pegged to the US dollar and financial conditions are at the whim of the Federal Reserve. Why raise money in Hong Kong, when financing costs are much lower on the mainland, they asked.
Don't lose heart. Mainland's financial markets are far from perfect in that only a select few have access, and the prevailing rates are thus artificially low. While Hong Kong's role as a connector between China and the West may be diminished, it still has a special place for Chinese companies and asset managers, who can't survive under Beijing's many draconian rules. They will want to come to Hong Kong to play. ©2024 Bloomberg
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets.