A Hong Kong firm that builds toll roads on the mainland, Hopewell Highway Infrastructure, is set to become the first company to sell bonds denominated in renminbi (RMB) to international investors. The Hong Kong-based toll road company started marketing the bonds on Monday and will use the proceeds to help finance the construction of a project in South China's Pearl River Delta (PRD) region.

The deal marks another important step in China's internationalization of its currency and was made possible after mainland regulators relaxed the rules on cross-boundary RMB flows on June 17.

Hopewell Highway has moved quickly to be the first to market corporate RMB bonds and said on Sunday that the funds will be used to finance the third phase of its Western Delta Route, a highway project that will connect Guangzhou with Macao and pass through cities such as Foshan, Panyu, Shunde, Zhongshan and Zhuhai.

"The issuance of the first renminbi corporate bonds by HHI marks a milestone in the development of renminbi business in Hong Kong," said He Guangbei, vice-chairman and chief executive of Bank of China (Hong Kong), which arranged the deal. "It not only helps diversify the renminbi bond offerings and deepen the local bond market, but also strengthens Hong Kong's position as an international financial center."

The new relaxed framework follows a pilot program launched in July 2009 that allowed authorized institutions in five mainland cities to use RMB for trade settlement. Under those rules, cross-boundary RMB flows were approved for only Hong Kong, Macao and Southeast Asia.

The June circular extended the rules to all overseas-invested enterprises and included cities in an additional 18 mainland provinces. Cross-boundary settlement is also now widened to include all countries and regions, and is no longer restricted solely to trade finance but can be used for other transfers, including dividends from onshore businesses. This will pave the way for overseas companies to fund their operations on the mainland through offshore renminbi bonds - and, crucially, to use the profits from those projects to repay investors.

The Hong Kong government announced supervisory principles for the issuance of RMB bonds in February, but until the June announcement it was not clear how issuers could either spend the money or service the debt. "Everyone had been puzzling over that," said a source with knowledge of the transaction. "This deal is an answer to that question," the source added.

Banks have been able to issue RMB bonds since last year, but the extension of the rule to all companies is a significant development that will lower funding costs for overseas firms' mainland operations.

Hopewell Highway still needs approval to transfer the proceeds of its RMB bonds into the mainland, but the speed with which it has moved on this deal demonstrates the government's encouragement of such transactions.

"In the past, it was unthinkable for companies to get such approvals," said the source, adding,

"But this deal signals that if you're a good company, in an industry encouraged by the government, you can now do the unthinkable."

As such, it is no surprise that Hopewell Highways has won the coveted first deal. The highway it is building in the western PRD region is a key infrastructure project in the heart of the mainland's export industry. But, according to the source, there is a string of deals in the pipeline and prospective borrowers are enjoying the encouragement of governments both in Hong Kong and on the mainland.

Officials in Hong Kong have spent months researching the development of the Eurobond market in the 1960s and hope that this deal marks the opening of a market that might one day rival the offshore dollar market.

Agencies

(HK Edition 06/29/2010 page3)