Formosa Bond Roundtable

Formosa bonds Sponsored by break into the Supporting organisation mainstream 's Formosa bond market has taken off in 2015, helped by regulatory changes and a favourable cross-currency swap. Issuers from all over the world have flocked to take advantage of keen investor interest in the asset class, with foreign financial institutions particularly active in bringing new renminbi- denominated deals. Carrie Hong, editor of GlobalRMB, a sister publication of Asiamoney, discusses the recent developments in the market and its future prospects with a group of key participants representing issuers, investors and intermediaries.

PARTICIPANTS Sarah Chen, head of fixed income, treasury division, E.Sun Bank Richard Liu, vice president, bond department, (TPEx) Eddy Lui, regional head of global markets for Greater China, global banking, Maybank Carol Tao, assistant general manager of fixed income section, treasury department, Bank of Taiwan Yvonne Tsai, senior vice president, fixed income products division, Cathay Life Insurance David Wang, CFO, Far Eastern New Century Corporation (FENC) Moderator: Carrie Hong, editor, GlobalRMB

Carrie Hong, GlobalRMB: Issuance of promote the issuance of international bonds introduce themselves as Taiwan Gretai- Formosa bonds and international bonds in in Taiwan. Last year it relaxed market listed ones, others didn't really understand Taiwan has attracted a lot of attention from regulations. This year it changed its English that they were actually listed on an bond market participants around the world. name from the GreTai Securities Market to exchange market. We therefore changed So far this year, according to our estimate, Taipei Exchange. What was the reason for the English name to give people a very 27 RMB bonds have been issued in Taiwan this change? clear idea of what we are. with a total volume of Rmb17bn ($2.7bn), The reason for choosing Taipei which almost equals the whole year's Richard Liu, TPEx: The English name was was because most of our peers derive issuance in 2014. The dim sum bond market changed to Taipei Exchange because our their names either from the name of is weakening and many investors in Mainland previous English title of GreTai Securities their country or of their city. To avoid China are beginning to show interest in the Market could be quite confusing to foreign confusion with the Formosa bond market. investors. When international institutions Corporation, we chose to rename the Let's start our discussion with Taipei invited their clients to list in Taiwan, their company as Taipei Exchange. Exchange. Over the past two years, the clients would be confused by our English As our trading activities are not limited exchange has been working very hard to name. Besides, when some companies to securities only, we do not include

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'securities' in our English title. In Taipei bonds in Taiwan; for others, it was their first Exchange all kinds of securities can time issuing them anywhere. be traded, and we also have different Maybank is one issuer that chose Taiwan boards. Fixed income products as well as for its debut RMB bond. Eddy, what were the derivatives, such as interest rate swaps, SARAH CHEN, reasons for this? What were the benefits of E.Sun Bank. bond forwards, and some other option choosing Taiwan as your target market? products, can also be traded. We also launched a gold trading platform and a Eddy Lui, Maybank: In 2015, we aim to trading platform for mutual funds. establish a Greater China RMB hub in Hong Kong. We have never issued any Dim Sum Hong, GlobalRMB: Can you outline the bonds in Hong Kong before, but we chose listing activities of international bonds and Taiwan to issue our first RMB bond because Formosa bonds in Taiwan over the past two Maybank has good connections with many years? Taiwanese local life insurers. After we issued our first dollar- Liu, TPEx: Starting from 2005, we began to denominated bond in Taiwan in 2014, see the listing of international bonds here many life insurers and banks approached in Taiwan, but the timing was not right, us and asked us if we would like to issue because demand was not there. We’ve Sarah Chen, E.Sun Bank: This year the RMB-denominated bonds. That is why we made many changes since 2012, after the Financial Supervisory Commission chose Taiwan to be our target market to RMB clearing bank was set up by China’s (FSC) launched the Financial Import issue our first RMB bond. central bank, and companies were allowed Substitution Program in order to attract Of course, we would like to promote our to issue Formosa bonds in Taiwan in 2013. more investment activity from overseas to company here in Taiwan. We are grateful At the very beginning, the issuance volume Taiwan. Taiwanese underwriters typically for Taiwan's local life insurers and banks was quite small. In order to promote the lack the experience in underwriting for their support in purchasing our bonds. issuance of Taiwan renminbi bonds, we international bonds, so it is very created a specific board for them. important for them to learn to bridge Hong, GlobalRMB: Compared with issuing In addition, some regulations are now the communication between domestic RMB bonds in Hong Kong, Singapore, or relaxed. Before the launch of the Financial investors and RMB bond issuers from Malaysia, what are the benefits of choosing Import Substitution Program, life insurers’ overseas. Taiwan in terms of pricing and ability to overseas investment was subject to a Local underwriters in Taiwan used to raise funds? stricter investment cap. The removal of mainly focus on the local market. They foreign currency bonds issued in Taiwan have not been very good at bridging the Lui, Maybank: Buyers focus on the yield from life insurance companies' 45% local investors and foreign issuers in return, while sellers focus on credit overseas investment cap has contributed to terms of changes in daily market prices, spread. In terms of RMB bonds, we do not an increase in investment from Taiwanese policy and regulations, and investor think that the credit spread of Dim Sum lifers in the Formosa bond market and the intentions. In the past year, underwriters bonds would be as favourable as that of dollar-denominated international bond — be they banks or securities companies Formosa bonds, so we will continue to market. — have changed a lot because they have issue RMB bonds in Taiwan. At the same time, the liquidity of the to be in line with the international secondary market has also been increasing market. Taiwanese underwriters have to Hong, GlobalRMB: Most of the issuers of as the issuance volume increases. For learn some best practice so that they can RMB bonds in Taiwan have been financial broker-dealers, trading hours can now strengthen their business activities. In institutions. Would it be possible for non- be extended. They are no longer limited the past year, we have observed a huge financial companies from Malaysia to come to trading from 9am to 3pm every change in Taiwan's local underwriters. We to Taiwan to issue RMB bonds in the second day, but can trade 24/7 to cater for the hope that this change will help Taiwan's half of this year? international investors. The flexibility has underwriters go global. been greatly expanded. Lui, Maybank: Yes. In March this year we Hong, GlobalRMB: Sarah mentioned that we took some Malaysian SOEs to Taiwan for Hong, GlobalRMB: For foreign companies have witnessed a lot of changes. This year, a non-deal roadshow. Maybank is the to issue RMB bonds in Taiwan, underwriters in particular, we have seen many foreign largest bank in Malaysia. We contacted our play a very important role. Sarah, as an companies coming to Taiwan to issue RMB business partners, and they have shown underwriter, what changes have you seen in bonds and international bonds. For some great interest in issuing RMB bonds in terms of issuance of RMB bonds? companies it was their first time issuing RMB Taiwan.

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Hong, GlobalRMB: David, Far Eastern New Because our financials are consolidated, Century (FENC) was the very first non- it was no problem for us to direct the financial company to issue Formosa bonds, money that we raised through RMB in May 2013. First, I would like to know why bonds to pay off the offshore USD debt. you decided to issue an RMB-denominated In a way, it was a tool for us to hedge bond. Secondly, the Formosa bond market against risks. I think that the timing was has been booming this year, but FENC has also right for issuers. Two years ago, we been absent. Are you looking to issue more issued the Formosa bond at an exchange RMB-denominated bonds in the second half rate of Rmb6.14 to the dollar, and it is of the year? now Rmb6.20. As we were the first non- financial company to issue a Formosa David Wang, Far Eastern New Century: bond, we were able to price at an interest FENC has been an active participant in DAVID WANG, rate of 2.95%. That is no longer available Taiwan's capital market, especially the Far Eastern for issuers nowadays New Century bond market, for more than 60 years. Corporation. Around 1989 or 1990, we issued Taiwan’s Hong, GlobalRMB: Why have you not issued first convertible bond. We also issued a any Formosa bonds so far this year? GDR in 1991. Since then, we have engaged digest those deposits. Around that time, in a lot of activities related to equity- the Taipei Exchange and the authorities Wang, FENC: There are many factors to linked securities. We consider this to be were proactively promoting Formosa consider. First of all, many markets can part of our responsibilities because we bonds. As such, we decided to issue our now offer access to capital. The Chinese were one of the only two companies to very first Formosa bond. government has lowered the interest rate have issued bonds here in Taiwan back to Ten years ago, the RMB was from 5.35% to 5.10% for a one-year loan; 20-30 years ago. We have paid very close appreciating, so many companies at that it has also slashed the reserve requirement attention to the development of the bond time were borrowing in dollars, using a ratio for banks. For large companies like market. currency carry trade to enhance profits. us, we could borrow an even lower interest Two years ago, we became the first In 2013, however, RMB began to fluctuate. rate at 4.6% if we took out loans in China. non-financial company to issue a Formosa As a result, many companies resorted However, if we were to issue a Formosa bond. I think that the reasons behind our to issue RMB bonds as a hedging tool. bond here in Taiwan, the interest rate decision are a very important reference Since companies had a large amount of could be higher than 4% for a three year for the future development of Formosa borrowing in US dollars, and the RMB bond. As China continues to lower its bonds. From the perspective of a company, was no longer as strong as it had been interest rate and cut the required reserve if it wants to issue a bond, especially previously, it was reasonable for issuers ratio for banks, there is no better place for an RMB-denominated bond, it needs to to think about issuing bonds in a weaker us to raise capital than China if we have an clearly understand the use of proceeds of currency. On the opposite side, investors RMB demand for capital in China. Under such issuance. FENC has had a substantial wanted to see a stronger RMB so that they such circumstances, we would not consider investment in Mainland China, so we have could make gains in both currency and issuing Formosa bonds in Taiwan. always had the need to raise RMB in order interest rate. Under these circumstances, Secondly, Dim Sum bonds are still an to facilitate our operational and capital it was crucial to find a balanced view option for us. Thirdly, China has set expenditures in Mainland China. between issuers and investors. up pilot free trade zones in Shanghai, Two years ago, we first thought about At that time, it was believed that RMB Guangdong, Tianjin, and Fujian. As raising capital in Mainland China. would continue to appreciate, which would China allows offshore RMB borrowing for However, the interest rate was quite high. be good for investors. But from a hedging companies operating in these free trade Even a one-year loan had an interest rate point of view, we believed the RMB would zones, we would, of course, seek out the of 6%-7%. Our second option was a Dim depreciate and it could be an opportunity lowest cost of offshore RMB borrowing Sum bond. However, investors in Hong to issue RMB bonds. We did not consider among them. Fourthly, when we export Kong were not familiar with issuers from a RMB loan in China because the interest products to Mainland China, we could Taiwan, and the all-in cost was also on rate was high and the Dim Sum bond settle the trades in RMB, thus reducing FX the high side. In 2013, Taiwan started market was not attractive. As a result, risk. Our central bank also encourages us to promote deposits in RMB. The market we started thinking about issuing RMB- to settle trades in RMB. That is to say, we began to grow, and OBU interest rates were denominated bonds in Taiwan. The timing do not need to raise additional capital in also rising. As a result, the total deposits was just right because the authorities were RMB in Taiwan. reached Rmb60bn and the environment actively promoting the market. We finally Obviously the Formosa bond market was suitable for issuing RMB bonds to issued Rmb500m. is therefore facing fierce competition.

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Taiwan authorities need to make extra That trend will not stop unless interest RMB supply remained tight in China at efforts to overcome those challenges and rates increase. the beginning of this year, the three year be sure to provide more opportunities for Currently, life insurance companies' offshore Yuan CCS even rose from 3% to both issuers and investors in the Formosa investment in foreign currency as a share 4.5%. That is why companies who had bond market. of their total investment accounts for not thought about RMB bonds in Taiwan more than 45%. Life insurance companies, decided to issue them around Chinese Hong, GlobalRMB: Both Eddy and David however, are still constrained by the New Year. At that time, we saw pricing of have mentioned that life insurance overseas investment cap. Therein lies a several different bonds within one day. companies in Taiwan have been huge buyers risk. We purchase international bonds But right now the CCS window has gone in the Formosa bond market, and they have using foreign currencies, and these bonds — that is why the issuance of RMB bonds also purchased a lot of Dim Sum bonds. are issued as callable bonds. If the issuer is coming down as well. Issuers came to I have a question for Yvonne. After the suddenly decides to call back these bonds Taiwan to issue RMB bonds when the CCS government relaxed the foreign investment without offering a rollover to existing was high due to concerns about capital limit of 45%, what kind of changes have bondholders, we may need to convert USD costs. These borrowers originally needed been seen? or RMB back into NTD so that we do not funding in USD. They issued RMB bonds in exceed the cap. Taiwan and then converted the money into Yvonne Tsai, Cathay Life Insurance: One of If we fail to do that soon enough, we USD through CCS because the funding cost the reasons why life insurers in Taiwan would not be able to comply with the was lower this way. were looking for investment opportunities regulations. Right now, the international Instead of borrowing in US dollars from in the overseas market or investments bond market continues to grow, and it the international market, where they denominated in foreign currency was provides a higher return. The best case would have to pay Libor plus 100bp, they that Taiwan's interest rate was simply scenario would be if the issuers do not call could choose to pay Libor plus 50bp by too low. That has been the case for more the bonds and therefore there is no need using the high CCS in Taiwan. The funding than two decades. For life insurers to issue to roll over. cost was greatly reduced. I remember that insurance policies in the past, they had in Taiwan the cost of issuing a three year to bear a cost of capital of more than 4%. Hong, GlobalRMB: This year the cross- RMB bond was as high as 5% earlier this However, there is a negative interest rate currency swap (CCS) has been driving the year. Currently, the three year CCS is down spread because the current interest rate in growth of Formosa bond issuance. Is this to 3% again. Taiwan is only 2%. situation going to be unique to this year Life insurance companies, as a result, or is CCS going to continue to impact the Hong, GlobalRMB: Sarah, what about the have been negotiating with authorities market? second half of this year? Is there going to be so that they could make more overseas another attractive CCS window for another investments. Now the investment cap Carol Tao, Bank of Taiwan: Yes, this year surge of RMB bond issuance? We are also has been raised to 45%. If we now issue we have seen a very special situation in seeing an inversion of the yield curve in CCS insurance policies denominated in Taiwan in terms of CCS. The CCS between pricing. Is that going to influence buyers foreign currencies, they are not counted USD and RMB has been very volatile. As when they try to assess RMB bonds? in the 45% limit. Formosa bonds and international bonds are also removed from Chen, E.Sun: In the first quarter of this the 45% overseas investment cap, so the year we saw an increase in RMB CCS due investment cap removal has created a lot to the depreciation pressure on RMB. It of opportunities for Taiwan's bond market. is likely that this will happen again in In the past, we did not have Formosa the second half of this year. In addition, bonds or international bonds. At that the Shanghai-Hong Kong Stock Connect time, RMB was a currency with a high is also a very important factor. RMB interest rate. In addition to the European outflows will also push up the CCS. As and US markets, we also invested in Dim the exchange rate of RMB is subject to the Sum bonds in Hong Kong. After the launch supply and demand side as well as the of the Formosa bond market, we entered technical side of the market, we cannot the market primarily because Formosa rule out the possibility that CCS will bonds and international bonds would increase in the second half of this year. not be subject to the 45% limit. RMB- In terms of the inversion of the short- denominated or dollar-denominated bonds end and long-end of the yield curve, I CAROL TAO, in Taiwan have higher yields than those of Bank of Taiwan. think that liquidity and expectations comparable products denominated in NTD. of future interest rates provide two

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perspectives to look at it. Currently the mentioned that some Mainland Chinese short-end interest and long-end interest bank headquarters plan to do so later rates are quite similar, but we are seeing this year. Will that provide a boost to the good liquidity on the short end which market? has caused liquidity concerns at the long end. Tsai, Cathay Life: When investing If we try to solve this problem by overseas, life insurers are required to setting a yield rate of 4.5% for both five choose companies with certain credit year bonds and ten year bonds, which ratings. However, there is no such one would investors prefer? They would, requirement for the Formosa bond or of course, choose the shorter bond. This international bond market. But a life problem is not necessarily caused by insurer would still face higher charges liquidity, but market preference. when calculating its risk based capital if YVONNE TSAI, Cathay Life it invests in a company without any credit Hong, GlobalRMB: As Sarah said, if a five Insurance. ratings. So we still favour companies year bond has a yield of 4.5% while a ten or bonds above investment grade. year bond has a yield of 4.6%, investors That would be better for us in terms of would prefer the five year. Right now, the Hong, GlobalRMB: This is very good news investment and capital charge. Dim Sum bond market and the Formosa indeed. Let us come back to Maybank, as an market do not have many long-term bonds. issuer. First, was it the CCS that motivated Hong, GlobalRMB: The international Is the CCS making this situation even more you to issue a Formosa bond? And second, community is aware that Taiwan is an RMB challenging for issuers? Richard, what can have you considered issuing longer tenor hub with huge deposits of RMB, but it is less regulatory and supervisory authorities do Formosas? educated on Taiwan’s RMB bond market. to solve the problem? They often do not know, for example, Lui, Maybank: When we decided to issue whether Formosa bonds are the same as dim Liu, TPex: For RMB bonds in Taiwan, a Formosa bond, tenor of course was one sum bonds, or whether it is easy to enter most issuers concentrate on the short of our concerns, but CCS was the most the Formosa bond market. end to middle of the yield curve. That is important driver. We needed USD, but We have seen very high issuance volume because the demand for long term RMB Maybank’s credit spread was very small of Formosa bonds this year, but the majority bonds in Taiwan is still quite small. But (e.g. Libor plus 60bp-70bp for three of investors are still Taiwanese. David, if life insurance companies in Taiwan years). We wanted to issue a longer tenor have you ever tried to reach out to more can offer more RMB-denominated bond, but we had to consider investor international investors when conducting insurance policies, the demand for demand. Most of the Formosa bonds we roadshows? long term Formosa bonds will gradually issued were purchased by banks; lifers increase. demanded longer tenors. Wang, FENC: Our company is a one of We are also now planning to develop a the largest business group in Taiwan complete yield curve from the short end Hong, GlobalRMB: Why didn’t you issue with many channels to raise capital. to the long end for the RMB bond market longer-tenor bonds for lifers? Those Taiwanese investors who invest in Taiwan. On May 25 this year, we will in Formosa bonds know us well. What’s launch a yield curve for RMB bonds in Lui, Maybank: Yes, some of our clients, more, we are a rated company, and that Taiwan. We will first launch the yield such as government-linked companies in makes it easier for investors to make curve for bonds rated A and A-. Malaysia, would like us to issue long-term investment decisions. Reputation and Around Q3 this year, some Mainland RMB bonds in Taiwan, of 20 or 30 years. ratings are crucial to bond issuers. If we Chinese banks will also come to Taiwan But CCS only has a benchmark yield curve want to issue RMB bonds, we still prefer to issue RMB bonds. We will approach of up to 10 years. For issuers, there may to do it in Taiwan. these banks and invite them to issue be no hedging tools beyond 10 years, thus We have issued ECBs, CBs, and EEBs to long term bonds so that we can develop creating risks for them. If hedging tools international investors, so they know us the longer end of the bond yield curve. for CCS become more mature, we would very well. We go to different markets for In addition, around September, we will definitely issue longer tenor RMB bonds various funding needs. For our company, start to compile a Formosa bond index in in Taiwan. to raise capital directly in USD, we would preparation for the issuance of Formosa do it in overseas markets. bond ETFs. Going forward, we will Hong, GlobalRMB: Yvonne, what kinds of continue to enhance the infrastructure issuer will attract you if they issue Formosa Hong, GlobalRMB: Formosa bond rates this environment in the market. bonds this year or next year? Richard year are higher, which can be attractive to

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international investors. Why is it that 99% But we are now planning to make it come to Taiwan to issue bonds. That is of the investors are still local? easier for foreign investors to enter the why promotion is very important. I think local Formosa bond or international bond Taipei Exchange has done a lot in this Lui, Maybank: From the buyside point of market. Traditionally, foreign investors regard. We have been working hard in the view, I still prefer Formosa bonds to dim needed to apply to become a QFII domestic market to promote the market. sum bonds in terms of yield. The yield (Qualified Foreign Institutional Investor) In sum, the construction of the yield of dim sum bonds is not that attractive before investing in the local market. We curve and promotion of the market in at the moment. As investors, we hope to hope that in the future we can change Taiwan as a regional investment hub will maximise our yield returns. That is why I our regulations; that is, they would not greatly enhance liquidity. will consider including Formosa bonds in need to apply to be a QFII before they our portfolio. could invest in Taiwan. Tao, Bank of Taiwan: Let me begin by Obviously, they will have tax consid- talking about regulations. From last Hong, GlobalRMB: Richard, do local erations if they invest in Formosa bonds year, the authorities began to adopt and international investors face any or international bonds offered by local liberalisation policies with regard to differences in the investment environment? issuers. the Formosa and international bond Do foreign investors have to pay different markets. We believe they will continue tax rates or need to prepare different Hong, GlobalRMB: Richard mentioned the to further open up the market. This, application materials? construction of the new yield curve and and the construction of the yield curve, the index. Do you think this will stimulate will further stimulate the growth of the Liu, TPex: We have done our analysis the secondary market and provide more secondary market for Formosa bonds. on the composition of participants in liquidity? Normally lifers or banks adopt the the Formosa bond and non-Formosa strategy of buy-and-hold when investing bond market. For the Formosa bond Chen, E.Sun: To drive liquidity, we in Formosa bonds. One of the reasons market, insurance companies, securities first need to construct the yield curve. is that there is not enough issuance companies, and banks each take an Second, we need to enjoy good name of Formosa bonds, which leads to equal share of around one third of the recognition in the market. I am really limited investment targets. That is market. On the other hand, 92% of positive about the construction of the why currently the liquidity of the bonds denominated in other currencies yield curve. USD-denominated bonds market is quite limited. However, after (especially USD) are held by (life) have really good liquidity in overseas further liberalisation of the market and insurance companies. markets because they have a complete construction of the yield curve, there will The trading volume in the secondary yield curve. It is also important for be better price-discovery mechanisms in market last year was quite substantial, Formosa bonds to have a complete yield the secondary market. at around NT$600bn. This has to do with curve covering both shorter-dated and the intermediation of underwriters who longer-dated bonds. Hong, GlobalRMB: People say that lifers first got the bonds from issuers and then Also, to increase market liquidity, all buy and hold. But are you likely to sell sold the bonds to real investors. you need potential participants to know more in the secondary market in future? Currently, there are not many more about your market before they Now lifers in Taiwan can go to China’s international participants in the Formosa Inter-bank Bond Market as direct investors. bond or international bond market. As rates in that market are higher, will that That is because most domestic investors negatively impact the Formosa bond market adopt the strategy of buy-and-hold, and in Taiwan? their demand still remains strong. The majority of buyers are still life insurance Tsai, Cathay Life: Let me answer the companies. Given the current issuing second question first — basically, no. environment, if they focus only on As previously mentioned, investment Formosa bonds or international bonds, in Formosa bonds or international there will not be much left for other bonds will not be counted as part of our participants in the market. overseas investment. They are totally separate. Hong, GlobalRMB: There will be no bonds Earlier on we were discussing longer left for international investors? dated bonds, and that if they can offer only a 10bp pick-up, will they lose EDDY LUI, their attraction to investors? People Liu, TPex: International investors need to Maybank. wait until domestic demand is satisfied. prefer 4.5% for a five-year bond [over

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4.6% for a ten year], yes, but that Liu, TPex: Subordinated bonds issued by discounting, it is even as low as 3.6%. The is not necessarily the case for life domestic issuers are allowed, but foreign rate is going down, and businesses will insurance companies. For life insurance issuers cannot issue subordinated bonds have more options when it comes to RMB companies, it is important to engage in in Taiwan. Can we open up the market funding in the future. asset-liability management (ALM) when for more structured products? As Taiwan There are several reasons why making investments. had some disputes related to structured international investors do not want to If I issue a 10 year insurance policy at bonds in the past, we do not have any invest in the international bond market in a cost of 4.3%, I would prefer to buy a plan for now to open up the market for Taiwan. In practice, investors rely heavily 10 year bond with a rate of 4.6% rather the listing of structured bonds in Taiwan. on the secondary market to offer liquidity. than a five-year bond with a rate of Unfortunately, our secondary market is 4.5%. There is only a 10bp pick-up, but Hong, GlobalRMB: Let's move on to the inactive. The issuance of dim sum bonds, the asset and liability durations cannot broader outlook. Taiwan is the second CBs or ECBs in the overseas market can match if I have the five year bond. Five largest offshore RMB market, the largest often induce active trading. In Taiwan, years later, while the insurance policy being Hong Kong. Will the RMB be included investors always buy and hold, and the still remains effective, I am not sure if in the IMF’s SDR basket? And if that investors primarily include cash-rich the market can still offer a rate of 4.5%. I happens, what kind of impact will we see lifers and banks. That is not a good sign would choose to buy the 4.6% bond. on Taiwan’s Formosa or international bond for the secondary market. That is why we tend to buy and market, on investment infrastructure, or We need all stakeholders to work hold rather than sell the bonds to bond issuance in general? harder to improve the situation. We the secondary market, to match our issuers are very practical; we go to places assets and liabilities. However, we life Chen, E.Sun: The establishment of that we find to be more favourable. insurance companies find it difficult to an RMB capital pool is crucial to the The government needs to develop identify good investments to do ALM. development of the Formosa bond the secondary market and remove all So sometimes we engage in short-term market. RMB will definitely become investment hurdles, like tax. However, trading, where liquidity becomes a very a critical part of lifers’ or banks’ there is still a long way to go. It is difficult important consideration. reserves. I am very optimistic about the for the market to become open and active development of the RMB market, and the at once. Hong, GlobalRMB: Is maturity mismatch a internationalisation of RMB will greatly serious issue for lifers? benefit the market. Lui, Maybank: I concur with David. Liquidity is key. Dim sum bonds have Tsai, Cathay Life: A little bit. In previous Hong, GlobalRMB: David, you mentioned a secondary market, and it is easy to years, the duration of our insurance that some companies choose to issue bonds trade there. We are different from lifers, policies was quite long, from 10 to 20 in China, probably because rates there are who are buy-and-hold investors. Indeed, years, and we were able to identify going down. We also have free trade zones higher liquidity will boost the market. We investment products with a favourable in Kunshan, Fujian, and Shanghai, where have a quota for buying onshore bonds spread. Nowadays we can go to overseas it is easier to access RMB capital. What is that allows us to buy domestically issued markets to buy products with a maturity your view on this trend? bonds in local markets. The bonds can of 20 to 30 years. Still, they cannot cover be traded conveniently. If the secondary what we bought before. Therefore, most Wang, FENC: Businessmen are very market can enjoy better liquidity, that will lifers’ liability duration is still longer practical, always looking for places with be a boon to the development of Formosa than their assets' duration. the lowest funding cost. I am really bonds. looking forward to Taiwan’s development Hong, GlobalRMB: We just touched into an RMB offshore centre. The cross- Hong, GlobalRMB: We have touched on on duration. If the issuance of RMB Strait trade activities of our company some of the challenges facing the secondary denominated insurance policies is are now settled in RMB rather than USD. market of Formosa bonds, and we have encouraged in future, there is also a need Nowadays, the total Taiwan trade reliance compared Formosa bonds with dim sum to have long-term assets denominated on China exceeds 50% directly and bonds. But still we have the question of why in RMB. When AT1 or tier two RMB bonds indirectly, so I have high expectations of there are so few international investors. For are issued in overseas markets, Taiwan’s Taiwan’s role as an offshore RMB centre. the Formosa bond market to take off, have lifers are very important investors, and Now we have diverse sources of RMB you considered connecting with the markets the issues seen this year have all had long funding. For companies, it is more in Singapore, Malaysia, or London? durations. Some lifers have suggested the cost-effective to borrow RMB locally. We possibility of listing such structured RMB can borrow RMB in China at a rate of Liu, TPex: In Taiwan, many Formosa products in Taiwan… 4.6%. For BAD (Bank Acceptance Draft) bonds are dual- or triple-listed in

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different markets. We are now planning we need to encourage the development of to work with other exchanges around RMB-denominated investment tools, be the world: issuers would only have to it RMB bonds, Dim Sum bonds, or some disclose information to one of the stock other assets. exchanges, and then the bonds could be traded in two or three stock exchanges. Chen, E.Sun: So far most of the Formosa We are working with our peers to lower bonds issued have been dated less the issuing cost for bond issuers. Issuers than five years; this has to do with the can then decide which stock exchange distribution of the yield curve and the is more cost effective for them to issue demand for capital. If we are to see an bonds. I believe that with international increase in longer dated Formosa bonds, co-operation, we can attract more issuers the four major [Chinese] banks are crucial. to Taiwan. In the second half of this year, a joint Regarding RMB bring included in the RICHARD LIU, stock bank is coming to Taiwan to issue IMF's SDR currency basket, once that Taipei Exchange. Formosa bonds. Those will be longer dated happens I expect RMB will soon become because the capital can flow back. one of the world's reserve currencies, Coming back to the secondary market, and that will lead to a huge increase of Taiwan. By doing so, we can transfer some we know that Formosa bonds were demand for RMB-denominated bonds of the credit risks to different market launched later than Dim Sum bonds, so worldwide. participants. we need to make sure that international That is an opportunity for us. Taiwan investors have a better understanding has a trade surplus with China. If we can Tao, Bank of Taiwan: Regulators have been about Formosa bonds. Dual-listing, as increase the amount of trade settled in trying to relax the rules and regulations mentioned by Taipei Exchange, is one RMB, I believe that we can expand the in order to attract more issuers to come to way. We have several dual-listing cases, RMB funding pool in Taiwan. With that, Taiwan to issue Formosa bonds. But some including between Taipei and London, and the demand for RMB-denominated bonds potential issuers said to us that they are between Taipei and Hong Kong. in Taiwan will increase as well. not willing to issue long-term bonds. For Dual-listing provides a very good Now Formosa bonds are issued or those foreign issuers, their funding need opportunity for issuers to be diversified, traded on a specific or designated lasts only for two or three years, but no and this will enhance Taiwan's visibility. board. But if they could be traded on the more than five years. More and more people will know about the exchange in general, not just limited to If they raise money by issuing long- existence of the market in Taiwan. This a specific board, it would lead to a more term Formosa bonds, the funding cannot will help drive the liquidity of the local active secondary market. be used in Mainland China unless they get market in Taiwan. We are also designing the infrastructure approval first. It takes a very long time for for launching a bond fund and Formosa those foreign issuers to get approval from Tao, Bank of Taiwan: We also hope to see bond ETF. Also we would like to encourage regulators in China to use the overseas more trading activity in the secondary underwriters to provide quotes in the first RMB funding there. That is why they market because Bank of Taiwan has a three months after a bond is issued, but mainly issue short-term Formosa bonds of huge position of Formosa bonds. we do not know whether that is doable or no more than five years in Taiwan. As far as we know, a lot of foreign not because most of the buyers of Formosa However, in the second half of this investors are very interested in investing bonds in Taiwan buy and hold, and that year, one of the major Chinese banks’ in Formosa bonds, but tax issues are leaves fewer opportunities for others. headquarters will issue RMB bonds in a major concern. If we cannot provide If we look at the history of the NTD- Taiwan, and those will be longer-term sufficient tax incentives, we will not denominated bond market, at the bonds, perhaps even over ten years. I be able to attract more international beginning we only had a primary market. am wondering whether there will be investors because they are looking for It took us a while to develop an active more opening-up policies in China after absolute return. They will definitely ask secondary market. So I believe that we that. It will be a great incentive for lifers about how much tax they need to pay. will follow the same path, with more because lifers demand absolute return on When a Formosa bond is issued issuers coming to Taiwan. investment for any investment target. The by a Mainland Chinese bank’s Taipei At the same time, because of the demand for seven year bonds was mostly Branch, according to our regulations it is demand for Formosa bonds in the spot from lifers. The demand for three year and considered to be from a local issuer. So market, we are also seeing some hedging five year bonds was mostly from banks. for international investors to invest in demand. We hope that in the future The amount of RMB deposits in Taiwan Formosa bonds issued by this bank, they we can allow China CDS to be traded in has been rising. In order to digest these, need to pay more tax. This is what these

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investors would consider seriously. That is issuers. Right now the interest rate in think that we can open up our market the first question. Taiwan is very low. That is why it is even further, not just to financial Also, non-bank companies currently quite attractive to international issuers. institutions. are not allowed to issue Formosa bonds Even banks like to come to Taiwan to In addition, I completely agree with Mr in Taiwan. However, if the four major issue bonds and take the money back Liu. Securities companies need to serve banks of Mainland China can provide with them. There are pros and cons. If as a market maker in the secondary guarantees for these companies, will we want to internationalise our market, market. If they do not hold a position our regulators consider allowing them then yes, we need to invite companies or give a quote, it will be very difficult to issue? I am thinking about major with good credit or with guarantee from for buyers or issuers to do their job. We companies, such as state-owned China to issue Formosa bonds in Taiwan. need to make it possible for securities companies. It will help drive cross-strait trading, but companies to serve as market makers. it will definitely crowd out local issuers. Hong, GlobalRMB: Internationally, most Hong, GlobalRMB: I would like to invite issuers in the Dim Sum bond market are Tsai, Cathay Life: The pool of RMB in each panellist to give some concluding still Mainland China companies, and a Taiwan is getting bigger and bigger, remarks. What are your views on the lot of Taiwanese investors are investing which serves as a good foundation. In development of the markets for Formosa heavily in those bonds, so the exposure to addition to tax considerations, issuer bonds and international bonds in the that credit risk is the same… diversification is also a very important second half of this year, and in the next consideration. They issue Formosa bonds five years? Let's start with Yvonne. Wang, FENC: If we increase the number of in Taiwan or Dim Sum bonds in Hong issuers of Formosa bonds, for instance, Kong because they have the demand for Tsai, Cathay Life: We obviously hope with companies endorsed by major using RMB as a funding currency. that Formosa bonds can become more banks from China, this will push up the In fact, most enterprises with RMB and more visible. Internationally, there interest rate and crowd out domestic demand are Chinese enterprises, so I are already a lot of markets that are

54 GlobalCapital June 2015 Formosa Bond Roundtable

mature in terms of bond issuance in Chen, E.Sun: From buyside to sellside, have seen that the RMB pool in Taiwan US dollars. We have a niche in Formosa as underwriters and investors, we can has been expanding rapidly. If RMB bonds. Sometimes in Mainland China see that the market is booming. The becomes one of the SDR currencies of liquidity tends to be tighter. Taiwan capital pool is expanding, and Taiwan the IMF, then RMB will continue to grow. can complement Mainland China by has already become more visible on However, if RMB becomes an extremely developing our Formosa bond market so the international stage. In the second volatile currency, this will probably that companies will find it easier to raise half of this year, I believe that there dissuade a lot of potential investors. capital in RMB. will be more opportunities because the If more trades between the two sides regulators have come up with more of the Taiwan Strait can be settled in Wang, FENC: The world is in a constant friendly policies. RMB, or if all transactions between the state of flux and we need to adapt We all have some suggestions for two sides will be settled in RMB in the ourselves to the constantly changing our regulators. As Mr Liu mentioned future, then the RMB pool in Taiwan will market. Mainland China is implementing earlier, the authorities are gradually continue to enjoy exponential growth. the "One Belt, One Road" policy. China deregulating, so in the second half of In order to promote the Formosa bond is without doubt rising. By 2025, China this year, the market of Formosa bonds market, both the supply and demand will become the largest economy in the should have a bullish prospect. side must work together. When we open world in terms of GDP. As a neighbour of up our market, we have to factor in Mainland China, we can probably benefit Liu, TPex: With regard to the future different opinions from different parties. from the opportunity to stand upon the prospect of Formosa bonds, from the It is just a matter of time before the shoulder of this giant next door so that we perspective of regulators, we want to see policy is implemented. can further develop our economy. more success. This is obviously what we Investors, issuers, government agencies hope for from the bottom of our heart. Tao, Bank of Taiwan: It takes time for a and underwriters — these four market We also hope that we can diversify market to grow. Before we started the players need to work together so that our issuers. For example, state-owned Formosa bond market, we already had we can further liberalise the market. companies of Mainland China will be the international bond market in Taiwan. With the concerted efforts of these four allowed to issue Formosa bonds. The market was very small, and most of players, I believe that Formosa bonds We want to adopt a gradual approach. the investors were retail investors. Now, and international bonds will have a very In the first stage, we will allow state- in the Formosa market, we are seeing an bright future in Taiwan indeed. owned banks, joint-stock banks, and increasing participation by banks and policy banks to issue Formosa bonds in financial institutions as the banking Hong, GlobalRMB: You have both mentioned Taiwan. In the second stage, we should industry accumulates huge capital. that Taiwan enjoys a lot of advantages by consider what type of companies from Most issuers of Formosa bonds and serving as an offshore RMB centre. The China should be allowed to do the international bonds are introduced by reason why there has been a lot of issuance same. We are already negotiating and overseas banks and investment banks, of Formosa bonds this year is because communicating with other relevant and they have also attracted some many issuers from different countries came government agencies. foreign investors to Taiwan. Today to Taiwan to issue bonds, from the newly- Where should we draw the line? We our regulators have been conducting established offshore RMB centres in France, know that corporations in China face a roadshows worldwide to attract Germany, the Middle East, Japan, the UK very different regulatory system from foreign issuers to come to Taiwan to and Malaysia. They could have issued bonds us. Although state-owned companies issue international bonds or Formosa in their respective countries, but they chose tend to have a better rating, we still need bonds. I believe that (Taiwan) financial to issue Formosa bonds in Taiwan because to consider what type of state-owned institutions such as banks can also take they believe that it offers benefits. companies should be allowed to come to advantage of overseas branches or other Taiwan first. channels to invite foreign issuers to Lui, Maybank: I hope that Maybank can We know that if we open our market come to Taiwan, instead of just relying represent ASEAN and help lead the way to state-owned companies in China, in on overseas foreign banks. by working with major state-owned addition to the potential benefits, there Many factors can contribute to the companies in Malaysia to issue more are also adverse effects that we need to success of the market, such as the efforts Formosa bonds. The previous speakers take into account. We need to make sure by securities companies and banks, have already touched upon what I would that the direction we are heading in will further deregulation by regulators and like to say, so I only have this to add. On not adversely affect the development of the internationalisation of the RMB. All behalf of Maybank, I hope that we can the Formosa bond market. these will benefit the development of the bring more GLCs to issue Formosa bonds On the demand side, in terms of the Formosa bond and international bond in Taiwan. accumulation of RMB in Taiwan, we market. ◼

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