US attempts to contain China often result in self-harm. Photo: AFP / Getty

SEOUL – Amid upbeat market sentiments on China’s economy, currency and bonds, the Export-Import Bank of Korea (Korea Eximbank) has issued its first dim sum bonds in three years.

Last week, the bank issued 1.5 billion yuan worth of so-called dim sum bonds, or yuan-denominated bonds issued by offshore borrowers in the Hong Kong market, and more South Korean public institutions are expected to follow suit.

Although Beijing is striving to upgrade its domestic capital markets, Korea Eximbank decided to float dim sum bonds in offshore financial center Hong Kong rather than panda bonds in the mainland. The latter – yuan bonds issued by offshore borrowers in China – involve more complicated issuance procedures and regulatory approval.

State-run Korea Eximbank provides export credit and guarantee programs to support South Korean enterprises in their businesses overseas. While more South Korean institutions may follow Korea Eximbank’s move, there is a major complication for Korean issuers of yuan-denominated debt: US dollar swaps.

Dim sum looking tasty

Korea Eximbank, which borrows about $10 billion a year, mainly issues dollar bonds but also seeks to issue other currency bonds, both to lower its borrowing costs and diversify its borrowing lines.

The bank has issued some 25.3 billion yuan worth of dim sum bonds since August 2011, when it was the first South Korean institution to do so. Following that 2011 play, the number of South Korean dim sum bond issuers had risen to more than 25 by 2018.

However, their number dropped sharply in 2019 as the US Fed’s interest rate cut led to lower dollar funding costs. With China providing the world with its largest growth engine as it powers out of pandemic-wracked 2020, the latest issuance is backed by macro sense and related confidence.

“As the expectation for the strong yuan grows due to the strong growth in the Chinese economy and the aggressive fiscal policy of the US Biden administration, yuan bonds have recently emerged as attractive assets,” Lee Dong-hoon, a director at Korea Eximbank, told Asia Times. “Investors in yuan bonds expect exchange gains from the strong yuan in the future.”

Supply and demand conditions in the yuan debt market are also favorable.

“As the large-scale yuan bonds mature this year and demand by existing yuan debt investors grows higher, the market conditions for issuing yuan bonds are rapidly improving,” said Lee, who heads the bank’s Treasury Unit.

Of Korea Eximbank’s total 1.5 billion yuan issuance, about 200 million yuan’s worth were grabbed by European investors. Traditionally, yuan bond investors have been Asian players based in Hong Kong, Singapore and Taiwan.

This suggests a widening geography of investors taking an interest in yuan debt, Lee said.

With Korea Eximbank having pioneered issuances of dim sum bonds in its home market, other players are likely to follow its latest lead.

“I understand that there are institutions that are looking into whether to issue,” said a source in Seoul financial circles who requested anonymity. “I understand that not only Korean institutions but also some European institutions are showing interest.”

Shadow of the greenback

For South Korean institutions, there is a snag attached to yuan issuances.

Even though China is South Korea’s leading trade partner, the US dollar remains the dominant currency for payments and settlements. As a result, when South Korean institutions issue foreign currency bonds denominated in currencies other than US dollars, they usually acquire greenbacks through a swap agreement to sell those currencies for dollars.

The bonds offered by Korea Eximbank have a maturity of three years with a coupon rate of 2.8%. However, the rate after the US dollar currency swap drops to six-month Libor + 0.11%. That is slightly lower than the Libor + 0.13% – the coupon rate of US dollar debt issued by Korea Eximbank.

Experts pointed out that the low US dollar borrowing and swap costs enabled by accommodative US macroeconomic policies could make South Korean issuers hesitant to go big into yuan-denominated bonds.

“When swapping dollars for yuan, it is not easy to get favorable currency swap rates,” warned one market source.