Gathering wind: Formosa bond market to reach CNY20 billion by year-end

And it just celebrated its 1st birthday.

Investors are expected to come feasting this side of the planet as regulatory changes have paved the way for easier issuance and broader international participation of RMB-denominated Formosa bonds, the domestic counterpart of Dim Sum bonds which are akin to Eurodollar bonds.

A report by Standard Chartered provides positive outlook for Formosa bonds, the key investors of which will remain to be local investors. SC forecasts that international investors will likely increase participation through non-Taiwan issuers subject to 0% tax.

The market started in March 2013, and since then 18 bonds have been issued for a total of CN14.1 billion, beginning with an issuance by Chinatrust Commercial Bank.

Mainland banks started issuing Formosa bonds in November 2013, and their issues have dominated since then, according to SC.

Historically, Formosa bond yields have been substantially lower than yields of Dim Sum bonds issued in HK, but have recently converged to Dim Sum bond yields. SC added that Formosa bond liquidity has been poor, but should improve on recent regulatory easing.

Here’s more:

Growth of the Formosa bond market may alleviate pressure on Taiwan’s banking system from an asset-liability mismatch in Renminbi. Taiwan’s Renminbi deposits, including those in overseas banking units (OBUs) and domestic banking units (DBUs) reached CNY 290bn by May 2014. We expect these to reach CNY 350bn by year-end. Until Taiwan is able to establish more re-cycling channels and further deregulate the local Formosa bond market, we believe the majority of its Renminbi deposits will continue to be channelled back to Bank of China (Taipei) via the local interbank market. We think that it is only when both domestic and international investors and issuers find it easy to tap the local Formosa bond market will it help Taiwan to reach its goal of maintaining and becoming a major offshore Renminbi centre in the longer term.