Presented at the Member Update:
RMB Financial Products in Hong Kong– April 7, 2011
Co-hosted by

Lifting the Dim Sum lid
RMB products at a glanceApril 2011
© Allen & Overy LLP 2011www.allenovery.com

RMB, CNY, CNH. Panda bonds, dim sum bonds, synthetic bonds. Loans, funds, derivatives, IPOs.
What do they have in common? They are all terms relating to the fast-developing Renminbi market inHong Kong. They are central to the discussions of bankers, lawyers and CFOs. Some of the jargon remains
confusing, the difference between some of them unclear. This paper distils Allen & Overy’s insight andtransactional experience concerning Renminbi in each of these products areas, bringing you the latest
market information and addressing your key concerns.

Where is RMB available offshore?
Hong Kong has the largest pool of RMB outside mainland
China thanks to an official arrangement with the PRC
government. RMB is largely “convertible and transferable”
in Hong Kong. Other jurisdictions may also accumulate
RMB, but only through cross-border RMB trade settlement
and only if used for such purposes. Due to a lack of official
arrangement (especially in respect of RMB clearing),
the development of RMB products in other jurisdictions
remains slow.

RMB, CNY, CNH –what’s the difference?
Renminbi, or RMB, is the official name of the currency ofChina. CNY refers to RMB onshore mainland China(“yuan” is the official unit of RMB hence the “Y”).
CNH refers to RMB offshore mainland China (mostlyin Hong Kong hence the “H”). Due to the effective
segregation of the onshore/offshore RMB markets, CNY
and CNH are subject to very different demand and supply
forces which result in different yield curves. CNH is virtuallytreated as a different currency.

Growth of RMB business
RMB trade settlement conducted throughHong KongRMB Deposits in hong kong

RMBbn

RMBbn

100

From Mainland to Hong Kong (lhs)

200

400

Companies (lhs)

140

80

From Hong Kong to Mainland (lhs)

160

350

Individuals (lhs)

120

60

Culminative net RMB trade payment
from mainland (rhs)

120

300

Number of company accounts (rhs)4080

204000-20-40-40-80
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN
2010

802006015040100205000JUL

2011

Source: HKMA

100250SEPNOV

2009JANMAR

MAYJULSEP2010

NOVJAN

2011

Source: HKMA

Panda bonds, dim sum bonds, synthetic bonds
IssuerTarget market

Key attraction

Panda – certain offshore entities

Mainland interbank
marketProceeds directly available for onshore use, large domestic
investor base

Dim Sum – mainlandcommercial banks

Hong Kong

Settled legal regime, mandatory repatriation of proceeds

Dim Sum – any offshore entity

Hong Kong

No mainland regulatory control for issuance

Synthetic – any offshore entity

AnywhereNo mainland regulatory control for issuance, no need tosource RMB funding to repay© Allen & Overy LLP 2011www.allenovery.com

Despite the hype, dim sum bonds are not the only option toraise RMB funding in the capital markets. Issuing panda
bonds or even using an onshore subsidiary to issue directly
onshore would ensure that funds are available onshore
without the uncertainty of repatriation. Synthetic RMB
bonds spare you the worry of sourcing RMB for repayment
whilst providing the investors with the same exposure to
the currency. There are also regulatory arbitrage
opportunities for repatriation between different types ofbonds, especially for some of the “sensitive” industry sectors
such as real estate. Even for dim sum bonds, repatriation by

way of equity injection or inter-company loans may not be
the only means of utilising RMB proceeds. Some issuers
have managed to consume the proceeds either offshore or
through cross-border current account payments.
Consider all options – very different solutions are available
in terms of timing, funding costs, investor base, profile anddocumentation. Sourcing of RMB funding for repayment
and RMB cashflow to service the coupon continue to be
the two issues at the forefront of issuers’ minds.

Dim sum bonds
Why are they attractive?

What to watch out for?

Investor’s perspective– Lack of other investment channels for offshore RMB
Issuer’s perspective– Cheaper than funding RMB onshore– Easier than funding RMB onshore or cross-border– No regulatory approvals required from mainland China,
Hong Kong or elsewhere, if sold to professionals– Look and feel of Eurobonds as they are documented
and sold much like Eurobonds– Ability to better match RMB assets and liabilities– Successful precedents by non-PRC corporates such as
McDonalds, Caterpillar, Galaxy, Orix, Unilever.

– Managing the regulatory risk in respect of repatriation
remains the greatest area of uncertainty in terms of successand timing. Applicable regulatory approvals are
discretionary and ad hoc, largely depending on yourindustry, company profile and intended use of proceeds.
The interaction of the regulators in charge (such as PBOC,Ministry of Commerce and the State Administration ofForeign Exchange) is sometimes unclear. Having the rightpartner as underwriter or external counsel with appropriate
regulatory resources is a key factor to consider.
– Documentation could be structured as a take-down off anexisting programme or a standalone issue. In both cases,
disclosure on local settlement and clearing (in the CMUservice) and currency and China related risks should beincluded. Illiquidity concerns for corporates which are notactive in the RMB market can addressed in payment terms
as well as risk disclosure.

RMB Bond issuance in hong kong

RMBbn
40

403535303025252020

1515

101055002007200820092010

Source: HKMA© Allen & Overy LLP 2011www.allenovery.com

LoansChinese regulations do not restrict how offshore banks candeploy the increasing amount of CNH deposits – including
lending – so long as their uses remain outside of China.
Under Hong Kong regulations, banks are not allowedto lend CNH to individuals and certain limited types ofcorporate but could otherwise lend CNH freely, by andlarge. Security over CNH deposits and CNH bonds
offshore can also be taken with ease and in the same way
as deposits and bonds in other euro currencies. Securitystructures involving RMB in onshore non-resident
accounts (NRAs) are also seen.
However, the CNH loans market is lagging behind thebonds market somewhat. Only one syndicated CNH loan
facility – a multi-currency facility including a CNH optionthat closed in December 2010 – has been reported todate. Why?

In addition to the repatriation issue similar to that fordim sum bonds, there is also currently no real interbank
market for CNH; liquidity is very much concentrated
within the deposit takers. There is a general view that
establishing a CNH reference rate (eg a HIBOR CNH rate)would facilitate the growth of floating rate lending and
an interbank market, but there are challenges inestablishing a reference rate.
Lenders will need to be comfortable with how borrowers
will source CNH to service their debt.
Furthermore, as is the case for bonds, the market isconsidering whether or not to legislate for a fall-backposition if CNH becomes illiquid – because of a drop incross-border trades being settled in CNH for whateverreason, or because of regulatory changes in China.
There remains a great deal of appetite in the market for
CNH loans to be put together; the obstacles highlighted
above will need to be resolved.

Funds, Structured Products and Derivatives
Currently, only RMB bond funds are available due to(i)the lack of other RMB instruments offshore and(ii)restrictions on cross-border investment in mainland
RMB instruments. The latter is likely to change once
“mini-QFII” starts – where Hong Kong subsidiaries ofmainland securities firms and fund managers will beallowed to invest in mainland securities (stocks likelyto be limited to 20%) in RMB. The first RMB fund inHong Kong launched by Haitong Securities Hong Kong(a subsidiary of mainland Haitong Securities) wasauthorised in August 2010.
It does not currently have, but leaves room in the future tohave, the ability to invest in mainland securities. It begs thequestion of what happens if such ability does not comeinto play during the life of the fund.

getting comfortable in addressing the RMB liquidity
issue. Similar to bonds, RMB denomination dictates
the inclusion of specific risk disclosure and payment
mechanics in the documentation.
There is now also some appetite in derivatives over thedim sum bonds, either via total return swaps or indices(which HSBC and Citibank are setting up). In theOTC derivatives context, market participants areseeking standardisation of language on inconvertibility,non-intransferability and (the most difficult one)
illiquidity as market disruption events specificallyapplicable to physically settled RMB transactions.
Repos over dim sum bonds are also being used to help
increase intra-day liquidity.

RMB structured products have been issued in Hong Kongon a private basis. HK regulators and HKEx continue
to mull over the launch of retail or listed structured
products – both weighing up technical readiness and© Allen & Overy LLP 2011www.allenovery.com

IPOs
It has been widely publicised that Cheung Kong, a major
property developer in Hong Kong owned by businesstycoon Li Ka-shing, plans to complete the listing of the first
RMB-denominated REIT (real-estate investment trust) thisApril. The status of this transaction has been the subject ofconflicting reports, including reports that the scheduled
launch has been delayed amidst concerns over RMB liquidity
amongst other issues. The Hong Kong Stock Exchange isexploring the feasibility of a RMB liquidity pool wherebanks, brokers and underwriters will work together toprovide RMB on a limited basis to investors who would
be able to trade in and out of RMB shares inHong Kong Dollars.

As REITs are closed-ended funds, redemption is not aconcern. For this and other reasons, immediate repatriation
into and timely repayment of proceeds out of mainland
China is not as pressing an issue as for the RMB bondissuers. Cross-border payment of dividends in RMB isalready feasible which would create the cashflow for paying
distributions to investors. However, it remains to be seen
how the large amount of RMB proceeds raised from theIPO could be best put to use.
It is also likely that the RMB or China related risk disclosurestatements in other RMB products will find their way into
the documentation in appropriately modified fashion.
The initial REIT deals are expected to pave the way for
general RMB denominated equities issuance in relatively
short order.

What’s next in RMB internationalisation?
Overall policy backdrop
Understanding the Chinese authorities’ overall policy
on RMB internationalisation, it is necessary to understand:– the existing liberalisation and constraints of the offshore
RMB market;– what to anticipate next; and– what you can do to lead the market.
The leading Chinese authority, the People’s Bankof China – the No. 2 Currency Policy Department,
was set-up specifically for this purpose andsupported by the State Council to lead the RMB
internationalisation initiative.

Stages of RMB internationalisation– Current account items (such as cross-border trade)
before capital account items (such as investment).
– RMB outflow before RMB inflow in respect ofcapital account items.
– Increasing both width and depth of the offshore RMBpool before allowing the free flow of RMB cross-border.

This would explain why, for example:– you should keep an open dialogue with PBOC
(whenever possible) – something that we do at A&O;
– there is continuing control over cross-border movementof RMB for capital account items, which results ineffective segregation of the onshore/offshore RMB
market, which in turn means the supply of RMB offshore
is not in all cases infinite, that is why liquidity of RMB
offshore remains the key issue behind all offshore
RMB products requiring the actual delivery of RMB;
– any cross-border RMB payment in respect ofcapital account items at this stage is in support of thecurrent account items and therefore unlikely to beunconditional (for example, allowing cross-borderinvestment on the mainland interbank market provides
investment channels for RMB accumulated throughtrade settlement);– the clearing bank in Hong Kong may offer conversion toand from RMB on an unlimited basis for cross-border
RMB trade settlement but conversion for general
purposes is still subject to overall quantitative control.
This, in turn, explains why there are two exchange rates
for the same currency pair involving RMB;

The key principle: to develop an international currency
that is supported by real economy and to avoid
currency speculation.

© Allen & Overy LLP 2011www.allenovery.com

– the legislation on overseas direct investment in RMB(ie RMB outbound) came out earlier than that oninbound RMB direct investment; and– for all inbound RMB payments, use of proceeds will
be a key issue for the regulators to verify to prevent
any currency speculation and ensure genuine
economic purpose.
Until now, conversion and availability of RMB offshorein respect of current account items (such as forinternational trade settlement) have been largely
unrestricted. On capital account and for outbound,
overseas direct investment by a PRC corporate can now
be made in RMB. On capital account and have been
for inbound, repatriation of RMB as loans or equity
investment is allowed on a discretionary basis andcross-border investment in the RMB instruments on themainland’s interbank market is partially allowed. With the
exception of RMB IPOs where The Hong Kong Stock
Exchange is actively pursuing the establishment of an RMB
liquidity pool, market solutions on all products are largely
consensual and contractual.

The natural next steps would lie in the further
opening of RMB capital account items such as:– Expansion of the panda bonds programme,
which would allow the issuance of RMB bonds on
China’s interbank market.
– Expansion of the RMB QFII programme (includingmini-QFII), which would provide more channels toinvest in mainland RMB securities (on the interbank
market and on the stock exchanges).
– Legislation on repatriation of RMB proceeds fromdim sum bonds, which would bring certainty to therepatriation issue and remove practices unfavourable tocertain industries.
– Possible legislation on foreign direct investment in RMB,
which would permit equity investments in China in
RMB regardless of the source of funding (ie not limitedto proceeds from dim sum bonds).

We have been involved in numerous landmark transactions since the development of the offshore RMB
market including, amongst others, issuances by Asian Develoment Bank, Caterpillar and Unilever. Thissnapshot will be followed by a more in-depth flyer on the different ways to raise RMB funding. For more
information on RMB products and our experience across the different disciplines, please contact either theDim Sum team at dimsumteam@allenovery.com or your usual Allen & Overy contact.

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or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP’s affiliated undertakings. CA1103062© Allen & Overy LLP 2011www.allenovery.com