By Kate Allen
Hungary has become the latest eastern European country to sell debt on the Chinese mainland, raising Rmb1bn in a three-year bond, as the government in Budapest seeks to expand its investor base and strengthen ties with Beijing.
The sale makes Hungary the first country to have sold debt denominated in the Chinese currency onshore as well as offshore, according to György Barcza, chief executive of Hungary's Government Debt Management Agency.
While Hungary's economy is benefiting from the improvement in eurozone growth, the country is also looking to develop economic links to China.
The latter's Belt and Road programme includes projects in Hungary, such as the construction of a railway between Budapest and Belgrade.
Saad Siddiqui, a rates strategist at JPMorgan, said that the rationale for Hungary's renminbi issuance was geostrategic rather than financial.
"The government's fiscal financing strategy is to reduce the amount of foreign currency issuance it undertakes, and yuan-denominated debt would seem at face value not to be consistent with that, but this is not primarily for financial reasons," he said.
"It helps to further cement Hungary's position, they want to be a connector for CEE and Europe more generally from the Chinese perspective."
Hungary's issue is the first sovereign renminbi deal since China earlier this month launched its Bond Connect scheme, which allows foreign fund managers to trade in Chinese debt markets directly without having to set up onshore accounts.
Budapest's deal on Wednesday was priced at a yield of 4.85 per cent, towards the lower end of the initial guidance of 4.6 to 5.2 per cent. It attracted orders of Rmb2bn ($300,000). Bank of China and HSBC acted as joint lead underwriters for Hungary.
Hungary raised Rmb1bn in a dim sum bond last year, which was priced at a yield of 6.75 per cent.
Mr Barcza said his country wanted to expand its investor base and take advantage of the significant volumes of capital seeking deals in the Chinese market.
Hungary's deal follows on from Poland, which last summer became the first non-Asian sovereign to issue a panda bond, raising Rmb3bn and at a yield of 3.4 per cent.
Panda bonds are renminbi-denominated debt sold onshore in China, as opposed to dim sum bonds which are offshore renminbi-denominated debt.
The first nation to issue a panda bond was South Korea in late 2015. The only other sovereign-related issuer to tap the panda market so far is the Canadian province of British Columbia, last year.
As China's capital markets have opened up to foreign investors, the growth of panda bond issuance has eaten into the dim sum market.
Hungary had already begun to plan an offshore renminbi bond when China loosened onshore issuance rules last year, Mr Barcza said, leaving policymakers with a dilemma about whether to push ahead with the dim sum offer or switch to a panda bond. In the end, they decided to do both.
As a result, the existence of both offshore and onshore renminbi-denominated Hungarian debt will offer investors the ability to compare trading conditions in both markets, according to Mr Barcza.
"Hungarian bonds could be used as an indication of the liquidity situation and demand in both those markets," he said.
In 2015, HSBC became the first foreign bank to issue a panda bond. German luxury carmaker Daimler became the first overseas non-financial company to do so, in 2014.