Asia-Latin America: Red herring?
When América Móvil took the plunge into China’s offshore renminbi-currency debt market this February, the world took notice.
This, after all, was a hefty sale – and the first so-called dim sum bond issued by a Latin American corporate. Preparation for the sale, underwritten by HSBC Securities, had been faultless. The giant Mexican telecom operator, owned by Carlos Slim, ran roadshows the previous September in Singapore and Hong Kong.
Investors were duly wowed, and América Móvil raised Rmb1 billion ($158 million) in three-year debt: a twice-oversubscribed sale with a coupon of 3.5% that compared favorably with a similar deal by China Development Bank, a major Beijing policy lender.
Slim’s move was clever, strategic and timely. Trade between Mexico and China has soared: bilateral trade with China jumped to $58 billion in 2011, from just $542 million 16 years ago.
Mexico is also a key target for major Chinese companies, particularly in the telecommunications sector. In 2009, Huawei, the world’s largest maker of telecoms equipment, moved its regional Latin American headquarters to Mexico City from São Paulo.
Yet Slim’s appetite for dim sum hasn’t yet been shared by his regional compatriots. América Móvil’s sale remains the only offshore renminbi issuance completed to date by any Latin American corporate or bank.
Many have tried to explain this phenomenon.
Latin American trade with China is booming: the latter selling manufactured goods and the former reciprocating with iron ore and foodstuffs.
Even banks are getting involved: in August 2011, Industrial and Commercial Bank of China (ICBC) paid $600 million to buy Standard Bank of South Africa’s Argentine operations. But while European and North American companies have flocked to issue offshore renminbi debt, their Latin American counterparts have held back.
So are they unwilling, uninterested, or simply lacking impetus? The reality is more complex. Latin America in general has strong Asia links, particularly with Japan, stretching back to the 1980s. “Latin American corporate names are liked and trusted in Asia,” says Malcolm Mui, a Hong Kong-based executive director at Nomura’s fixed income syndicate desk for Asia ex-Japan.
Enthusiasm for Latin American debt runs surprisingly deep in the region. One-fifth of the entire book of Banco do Brasil’s $750 million dollar-denominated perpetual bond, completed this February, was snapped up by Asian investors.
Work in progress
Yet when it comes to China and Latin America – at least on the debt side of the financial world – something hasn’t quite clicked.
Some put this down to a simple matter of critical mass. If América Móvil’s China foray had been followed up by similar sales by, say, Petrobras, or Brazilian conglomerate Odebrecht, the picture would be very different. China and Latin America would be seen as having drawn closer together, and Beijing would be a step closer to its aim of creating a globalized trade currency.
That’s not to say that Latin corporates, lenders and even development banks aren’t interested in following Carlos Slim’s lead. In mid-October, José Félix Magaña, the Central American Bank for Economic Integration (CABEI) treasurer, told LatinFinance that the regional development bank was mulling a Rmb300m-Rmb500m ($48 million – $80 million) issuance with a three or five-year tenor. He identified a brace of offshore renminbi issuances, one by Korea Development bank, the other by América Móvil, as his inspiration.
Corporación Andina de Fomento (CAF) is also lining up a possible renminbi bond, the Caracas-based regional development bank told LatinFinance. CAF’s aim is simple: to diversify its funding sources away from the dollar, euro, Japanese yen and Swiss franc. CAF’s planned issuance, which builds on the success of similar offshore renminbi sales by the World Bank and the IFC, will likely be more of a starter-pack than a blockbuster deal, being no larger than Rmb200m with a tenor of five years or less.
The bank’s chief financial officer Hugo Sarmiento told LatinFinance that the sale could move forward apace around the end of the year. Analysts said the moves were part of a long-term trend, but that trade between China and Latin America remained largely a one-way street.
“Only when we see more Latin American corporates investing directly in China, are we likely to see renminbi-denominated bonds take off,” says one Hong Kong-based investment banker who has worked on a series of dim sum sales.
Several banks have also had discussions with Nemak, a maker of high-end auto parts owned by Mexican conglomerate ALFA, about issuing a smaller dim sum bond.
Meanwhile Latin American corporates, particularly in the metals and mining sector, have long been linked with initial public offerings in Hong Kong. That would make good sense: the region continues to sell everything from copper to coal to the Chinese, and Latin American markets are likely to tap primary markets for capital in Asia – most likely in Hong Kong or commodity-focused Singapore, in the years ahead.
The relationship between the two regions is, as Miguel Montoya, a Brazilian-born, Beijing-based partner at KPMG’s China Transaction Services team, admits, one of “growing complexity”.
Chinese mainland firms are looking to Latin America to boost growth. To many Chinese investors, Latin America is not just a feed source any more but a region vital to China’s quest to keep economic growth in the high single digits. Likewise, Latin American multinationals are, believes Montoya, “catching up with European and North American counterparts in their understanding of the Chinese market”.
Yet he struggles to see how an increasingly equalized relationship can progress into one where Chinese and Latin American investors queue up to buy one another’s bonds. “There is a clear appetite for Latin American assets from China’s investor community,” says Montoya, “but it is hard to foresee whether a trail of dim sum bond offerings by Latin companies will follow the América Móvil one.”
Chinese analysts are equally unsure. Weisheng He, a Shanghai-based fixed-income analyst at Citi, highlights the uncertainty that some Chinese feel about investing in Latin American debt. “The Europeans are coming to China, and the North American firms are coming to China,” he says. “But still I don’t see too many Latin American companies investing in China. This might take off, but it hasn’t yet, and that’s why I don’t see too many more Latin American companies issuing dim sum bonds in the near future.”
Nevertheless, Chinese issuers (notably the country’s leading banks) continue to boost the growth of the dim sum market, even though the total amount of China’s currency held offshore has slipped this year. It stood at a high of Rmb627 billion at end-November 2011, but has slipped to Rmb554 billion at the end of May, according to figures from Thomson Datastream.
Despite this, the total amount of new renminbi offshore bonds issued in the first half of 2012 rose to $75 billion in the first half of 2012, from $44 billion a year ago, according to Bloomberg data. And it’s clear that the complexity and size of the investor base is growing.
ICBC’s own Rmb1 billion offshore renminbi bond was 5.5 times oversubscribed from around 90 accounts.
To be fair, other factors have mitigated against a Latin American rush to issue dim sum bonds. Cultural issues aside, Latin American bonds have largely enjoyed a stellar year, allowing major regional corporates and banks to sell debt to investors closer to home, rather than in East Asia.
‘This story isn’t over yet’
Moreover, the renminbi remains an under-developed currency, which is unlikely to become fully convertible for years to come.
Then there is the value of the currency itself, which, after a long period of steady, incremental appreciation, lost 1.2% of its value against the dollar in the first seven months of the year. This, along with the narrowing gap between the interest rates of offshore and onshore renminbi deposits, has stalled the markets.
In many people’s eyes, China’s currency still hasn’t developed as far and as fast as earlier expected. “We expected to have seen a real offshore renminbi market having developed by now,” says one Hong Kong-based syndicate banker.
Perhaps this is to be expected. Dim sum bonds such as the América Móvil sale are authorized piecemeal, one by one. Beijing still pulls the levers on its currency, and will continue to do so for years to come. “I don’t see China loosening the reins in terms of approving deals,” says Nomura’s Mui. “But I do expect to see more transactions taking place, including some from Latin American companies.”
But this doesn’t mean that China’s dim sum market is a one-hit wonder. Latin America’s sophisticated and world leading corporates will return in time, and in force. “East Asia will come into play more and more for Latin America,” says KPMG’s Montoya. “This story isn’t over yet.”