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September 23, 2017

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Local financial institutions to reap big-time gains from Formosa bonds: analysts

TAIPEI, Taiwan -- With growing interest from mainland-based policy banks in issuing Formosa bonds on the GreTai Market in Taiwan, local banking and life insurance sectors are expected to benefit the most, analysts said.

On Nov. 27, a day after the Financial Supervisory Commission (FSC) said Chinese companies could issue renminbi-denominated bonds in Taiwan to institutional investors, the Hong Kong branch of Bank of Communications applied to issue 1.2 billion renminbi in three-year 3.4-percent bonds and five-year 3.7-percent bonds.

GreTai Securities Market, which reviews and approves bond listings in Taiwan, also announced on Nov. 26 that in addition to the Chinese subsidiaries of Taiwan-listed companies and banks, Chinese policy banks, state-owned commercial banks and joint-stock commercial banks could also issue offshore renminbi bonds in Taiwan.

Analysts from Investment Asia said that Taiwanese banks will benefit, and those with large outstanding reminbi deposits, such as Mega International Commercial Bank (兆豐國際) and CTBC Bank Co. (中信銀行), will benefit the most.

The Formosa bonds will allow Taiwan's banks to diversify their renminbi assets and better match their renminbi assets and liabilities. Taiwan has seen steady growth in renminbi deposits since the formal establishment in February 2013 of direct renminbi and New Taiwan dollar clearing across the Taiwan Strait.

Taiwan life insurers will also benefit because the Formosa bond market potentially widens their investment choices. If the FSC allows them to invest in these bonds, they will gain an additional outlet for their renminbi-denominated insurance funds and improve asset-liability management.

In 2012 and 2013, more than 55 percent of dim sum bonds were issued by Chinese policy banks or major Chinese commercial banks. The Taiwanese banks' renminbi deposit balance reached 123.25 billion yuan at the end of October 2013, which far surpassed their renminbi loans of only 9.52 billion yuan.

Banks have filled this gap by placing their excess renminbi funds mainly in the interbank market, or partially in dim sum bonds. The Formosa bond market will broaden Taiwanese banks' investment options. Furthermore, dim sum bonds with significant size issued by major Chinese banks often offer longer tenures and higher yields over interbank rates as tracked by the CNH HIBOR fixing rate. Therefore, Taiwanese banks also benefit from a yield pickup on Formosa bonds, which will in turn help improve the margins on their renminbi books.

It is also worth noting that the Export-Import Bank of Korea in early January printed an innovative 1 billion yuan (US$165 million) dual-tranche offering of dim sum and Bao Dao bonds.

The transaction marks a gradual merging of the two markets as both tranches will be settled through Euroclear and Clearstream as Reg S bonds, according to foreign news wires.

Dim sum bonds are offshore renminbi-denominated bonds sold outside China and Taiwan, while Bao Dao bonds are offshore renminbi-denominated bonds sold in Taiwan.

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