GBA Brief

An Rmb2 billion bond deal is a financial first for Macau

China’s Ministry of Finance sells the first ‘lotus bond’ in Macau in a bid to boost the city’s role as an offshore centre for the yuan. Macau wants to focus on promoting the currency to Portuguese-speaking nations. 

The Chinese yuan and the Hong Kong dollar are the better known of the three currencies in the Greater Bay Area (GBA). The other one – the pataca, which was first issued in 1901 – serves as a reminder of Macau’s colonial history, and is still termed as pou bai– or ‘Portuguese money’ – in Cantonese today.

All the same, it was the yuan getting more focus this month in Macau, where China’s Ministry of Finance issued Rmb1.7 billion of three-year bonds to institutional investors, plus another Rmb300 million in two-year paper to retail buyers. 

The sale of the yuan-denominated bonds was a first for the city, where they have been dubbed as “lotus bonds” to distinguish them from the “dim sums” typically sold an hour’s ferry ride away in Hong Kong. 

HSBC acted as Joint Lead Manager and Joint Bookrunner on the deal, and was the only international bank in Macau to support the issuance, showcasing the strength of its network in the GBA. “The issuance of the yuan-denominated sovereign bonds in Macau is an important strategic milestone to promote its financial market in the context of the Greater Bay Area. As a strong starting point, this implies foreseeable future opportunities to enhance the fiscal and financial cooperation between Macau and other major cities in the area, such as Hong Kong, Guangzhou and Zhuhai,” said Lau Pak Hung, CEO of HSBC Macau.

 The deal was timed to coincide with the former colony’s return to Chinese rule 20 years ago, and is also part of efforts to diversify the city’s economy beyond the gambling sector, an effort we wrote about a few weeks ago.

Macau is still a long way behind the larger hubs for the yuan offshore, especially Hong Kong, which is home to the deepest pools of deposits, the largest usage in trade settlement, and the widest range of investment activity. But it wants to do some catching-up and the Outline Development Plan for the GBA, which was published in February, mentioned its aspirations to become more of financial hub.

The promise is that a yuan-based stock market will be launched in the gaming enclave and that there will be other specialisations in areas like export credit insurance. But most of all, Macau’s positioning has a Lusophone edge, especially in tapping demand for yuan services from markets like Brazil, which did $87.5 billion of business with China in 2017.

Less than 3% of the local community spoke Portuguese at last count, and much of China’s trade with the largest Lusophone markets is for commodities, which is typically priced in dollars. However, the Macanese government clearly sees a chance to establish a financing platform for Portuguese-speaking partners, including finding new ways of funding infrastructure deals under the Belt and Road Initiative.

The yuan’s spread as a global currency requires more ways of investing with it, not just holding it on deposit or using it to pay for cross-border trade. That means that this month’s bond sale is a breakthrough for the yuan’s internationalisation, and not just a matter for local celebration. The pataca has survived more than a century as a standalone currency, but the future is much more likely to belong to the yuan.