BC government dim sum bonds a success in Hong Kong, but give indigestion to many here in British Columbia
As Harper’s old fishing buddy Rob Ford paddled up Denial earlier this week- and continues to, very slowly of course,the ongoing gong show is like watching a train wreck in slow motion – his theatrics have provided ample cover for a variety of stories out west that barely registered on the radar.
Lets start with a serving of Dim Sum .. bonds that is.
In a news release issued 6pm Monday evening, the BC government announced they had successfully issued Chinese currency (Renminbi) bonds.
In doing so, the BC government effectively made financial history, since they are the first foreign government to issue Chinese currency bonds in the Chinese market. From Reuters:
“British Columbia’s dim sum bond will be listed in Luxembourg. HSBC is the sole bookrunner of the transaction. Bank of China and Industrial and Commercial Bank of China are co-managers.”
Ok, let’s just stop for a moment right there.
First, what is a dim sum bond?
“A bond denominated in Chinese yuan and issued in Hong Kong. Dim sum bonds are attractive to foreign investors who desire exposure to yuan-denominated assets, but are restricted by China’s capital controls from investing in domestic Chinese debt. The issuers of dim sum bonds are largely entities based in China or Hong Kong, and occasionally foreign companies. The term is derived from the Chinese cuisine that involves serving a variety of small delicacies and is especially popular in Hong Kong.”
China is hoping the dim sum bond market will help internationalize the Chinese dollar, but until the BC government jumped into the fray, they had generally only been issued by corporations that have future inflows of Chinese currency that could offset any losses from changes in currency prices.
For a provincial government, it’s without a doubt, a bit of a risky venture. HSBC assumes some of the risk as the bookrunner and the BC government has also reinvested the proceeds into a secure investment – a term deposit, according the Finance Ministry staff, in the same market. More on that in a moment.
However, HSBC who is the sole bookrunner on this deal, not only faced money-laundering accusations last year, but now finds itself dragged into the spreading investigation into allegations of foreign currency rigging.
Furthermore, the Bank of China and the Industrial and Commercial Bank of China are two of “The Big 4” banks owned by the Chinese government.
They are the co-managers of this bond.
In a time when many governments are concerned about Chinese state-owned investment in particular, it’s remarkable that the BC government would make this bold move, which has not been undertaken by any foreign government to date, not even to woo Chinese investment and trade. They are effectively allowing the Chinese government direct access to the management of this bond!
Sources indicate that there is a very good reason foreign governments haven’t ventured into this area yet, and it has a lot to do with the fact that China is still a one party country where the government closely controls the flow of its currency in and out of the government. Dealing with the Chinese government is not the same as dealing with Japan, or the US or any other trade country -period. That alone entails a degree of risk that can’t be hedged – or offset – by investing bond proceeds in any term deposit.
Of course, this immediately caught my eye since talk of the possibility of these bonds being issued made news late last year and again in January – at the time Assistant Deputy Minister Jim Hopkins told Chinese media that ‘The issuance of the bonds will be used to fund BC’s schools, hospitals and highway infrastructure.’
According to the government’s new release however, the government: ” immediately reinvested the proceeds in a matching and secure CNH investment, resulting in a positive return and protecting against foreign exchange risk.”
Curious as to the nature of this secure investment – a valid question I’ve yet to see asked – I called the Ministry of Finance to ask what specifically the government reinvested in, and was told: “Something like a term deposit.”
When pressed for the specific name or investment vehicle that the proceeds were put into, the communications contact had to investigate further and confirmed late Wednesday that it was a renminbi term deposit.
However, it was reported today in the China Daily, that:
“Michael de Jong, British Columbia’s finance minister, said in Beijing that the province immediately reinvested the funds in secure investment projects, including education, healthcare, transportation and energy resources.”
Hmmm. Which is it – a safe and secure Renminbi term deposit…. or education, healthcare, transportation and energy resource projects?
Did the province of BC actually invest all of the proceeds from the bond issue, or only part of it? Did the BC government borrow against this transaction with another lender for instant access to funds, or are they playing a game of public relations that counts on many British Columbians not reading Chinese dailies? Because one thing is certain – these bonds mature in one year at which time they would be paid out with interest. That means whatever investment the government placed the proceeds from the bond sale into, would have to give a good enough return to pay the bonds out at the maturity date, AND make a profit for the government that could then be placed into schools, etc… otherwise it would all have been done for the sake of relationships and would cost taxpayers in the end.
So which is it?
At least the BC government has been somewhat honest in stating what this foray in the dim sum bond market is all about :”It reflects the provincial government’s desire to promote stronger relations between China, the Province of BC and Canada.”
This history making bond issue by the Clark government comes on the heels of the also first of its kind pact between the Chinese government and another Canadian province – Alberta.
“Alberta Energy Minister Ken Hughes says the framework on sustainable energy development gives Alberta direct access to decision-makers and strategists at the highest levels in China.
Hughes, who spoke to reporters from Beijing, said the deal’s importance was highlighted by the presence of Chinese President Xi Jinping and Canadian Gov. Gen. David Johnston.
He says the deal is a critical step toward increasing trade with China.
“It is the single most important market Alberta will have for the next 50 years.”
The minister says what he is hearing from leaders in China makes it even more imperative to get a direct line for Alberta crude oil to the Pacific coast.”
Now, here’s where we get to the irony of it all.
While Rich Coleman and Gwyn Morgan are busy pretending to be columnists and that BC is the best fracking place on earth, and Christy is bragging how we now have quadrillions of LNG reserves rather than trillions… the rosy glow is fading on LNG as reality starts showing it’s not so rosy future.
(How is it that Rich Coleman can state that fracking is safe when the industry already acknowledges a lack of transparency in violations? )http://www.vancouversun.com/technology/Commission+lacks+transparency+fracking+violations/7982077/story.html
A report from an Alberta think tank states that the expectations of the BC government a year ago may be tough to deliver considering BC is very late to the table and our supply costs to bring LNG to market are much higher: http://northcoastreview.blogspot.ca/2013/10/alberta-research-foundation-puts-bc-on.html
That full report can be read here http://cwf.ca/pdf-docs/publications/Managing_Expectations_October2013.pdf
This was followed by the news that the Haisla nation LNG project in Kitimat is facing hurdles as one of its partners fends off insolvency, following the default on a loan obtained from a Chinese partner. The case is now in BC courts. http://www.vancouversun.com/business/Loan+default+threatens+solvency+partner+project+proposed+Kitimat/9124652/story.html
And of course, the truth about the many hurdles PETRONAS faces with regards to their LNG investment in B.C. came out yesterday – it seems photo ops trumped reason and the PM wasn’t as happy as he pretended to be when the deal was announced… means that it doesn’t matter how much gas we have, if it cant, or wont get to overseas markets because of foreign government ownership issues: http://www.straight.com/news/523771/malaysian-state-owned-energy-company-petronass-liquefied-natural-gas-investment-bc-faces-hurdles
This, all on top of the report issued recently by the International Gas Union, that states ‘LNG project costs in B.C. far exceed those in the U.S., making the demand for a higher price overseas “difficult to financially justify”. ‘
One wonders just how far the Clark government ( and the Redford, for that matter) will go to make their resource fantasies come true… and how much they will compromise and sell to make sure that happens.
Considering China still has a horrific human rights record and while the federal and provincial governments are fine to look the other way, I am not. It’s appalling. Nearly daily, a quick search of ” Human rights+ China” brings forth new stories on appalling worker conditions and person human rights violations.
Not everything in life is black and white and yes, there are 50 shades of grey. But when it comes to what we find acceptable as a civilization, as mothers and parents and human beings, where do we draw the line?
That is the question British Columbians – and Canadians – will have to confront as our elected governments fall over themselves to make deals with a government still ruled by the Communist Party of China. But then again, when it comes to the BC Liberals, ‘Envy is ignorance.”