By Nethelie Wong

HONG KONG, March 2 (IFR) - Three Chinese policy banks are preparing to issue the first offshore renminbi bonds to be listed on the London Stock Exchange and targeted specifically at a European investor base.

The issuers of the so-called Dim Sum bonds are Agricultural Development Bank of China, China Development Bank and Export-Import Bank of China. Multinational companies, including a UK-headquartered retailer, are likely to follow with similar deals, according to people involved in the potential deals.

"Chinese policy bank issuers, as quasi-sovereign credits, are good to arouse more interest from Europe-based investors," said Augusto King, co-head of Asia debt capital markets at RBS.

The deals will form the centrepiece of efforts of both the Chinese and UK governments to develop London as an offshore centre for the renminbi.

"They [the transactions] will facilitate Dim Sum bond trading in London and open up that market to a broader investor base," said Candy Ho, HSBC's Asia-Pacific head of renminbi business development.

An increasing number of asset managers in Europe are setting up dedicated funds to invest in renminbi products, and a handful of banks, including Bank of China, HSBC, RBS and Standard Chartered, have started to take renminbi deposits in London. Banks have also set up China desks in London to give advice on offshore renminbi transactions.

"We would like to see the offshore renminbi market developing to include larger ranges of investors and instruments," said Andy Seaman, an executive partner of London-based fund management firm Stratton Street Capital, which pioneered the asset class by setting up a renminbi-dedicated fund in 2007.

A growing percentage of Dim Sum bonds marketed out of Hong Kong - and listed in the SAR or Singapore (or not listed at all) - have been sold to European and US investors in recent months.

For example, European buyers booked 9 percent of CDB's 1.5 billion yuan ($234 million) 15-year Dim Sum bond in January this year. Meanwhile, European and US investors took 18 percent and 26 percent, respectively, of America Movil's 1 billion yuan Dim Sum in February - the first 144a offshore renminbi deal - and 44 percent of February's 500 million yuan three-year from German chemical firm Lanxess went to Europe.

RELYING ON HONG KONG

Still, despite that progress, it is clear that total deposits in Europe are still too small to support bond issues on their own. This means that, even if the upcoming issues boast the London-listed branding, they will still have to rely on liquidity in Hong Kong.

Altogether, there are 576 billion yuan of renminbi deposits held outside China and available for investment, according to Dan Kuhnel, director of primary market relations at Euroclear, with the vast majority in Hong Kong. "There's a significant amount of idle cash still to be used for securities investment. And investors are eager for more issuances to come to market," said Kuhnel.

"The idea of creating an additional renminbi market is to instill more liquidity and put as much of the available renminbi deposits to use," said Kuhnel.

There are more than 45 billion yuan of Dim Sum bonds and synthetic offshore renminbi bonds that have been issued and settled directly in Euroclear Bank international primary market placements. In Hong Kong, the outstanding amount is in excess of 194 billion yuan.

In just two years, offshore renminbi trading has grown to around $2 billion per day from zero. That is a tiny portion of the $4 trillion a day in global foreign-exchange trade, but no longer negligible.

As the largest foreign currency trading hub and a major asset management centre, London does not want to miss out on the opportunities that the rising star of the Chinese currency offers. Overall, London already has about a 15 percent share of the offshore renminbi foreign-exchange market, according to HSBC.

The renminbi was used for just 0.29 percent of all global payments in November, but the potential for expansion is huge.

Around 8 to 9 percent of China's trade (about $2.9 trillion in 2011) is now settled in renminbi, a trend Beijing is encouraging as part of its efforts to internationalise its currency.

(This article is from the International Financing Review, a Thomson Reuters publication.

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