A consensus is forming among players in the still nascent renminbi-denominated bond market. Alternatively called the CNH market, or colloquially the dim sum market, Chinese offshore bonds are appealing to both investors and potential issuers.
The size of the offshore renminbi market has surged from Rmb36 billion in 2010 ($4.6 billion) to Rmb110 billion today, attracting new investor participation that is likely to expand further.
Until mid-2011, the appreciation of the renminbi was a one-way-bet, so the market was mainly a currency play for investors who would tolerate low coupons. That concession meant that borrowers could access cheap funding. But perceptions about the trajectory of the currency then changed. Interest rates on new bonds were forced higher, as investors focused more on the relative value of yields compared to other markets for similar credits.
“The origin of the issuers has also transformed; almost all of the first offshore Rmb borrowers in the dim sum market were Hong Kong or Chinese companies, but now the profile is far more diverse, with international banks and companies tapping the market,” said Eu Han Lee, a specialist in credit capital markets from Goldman Sachs, speaking at the fourth Annual Asia-Pacific Debt Investor Forum, hosted by FinanceAsia and AsianInvestor at the Conrad hotel in Hong Kong yesterday.
Furthermore, the offshore and onshore markets are likely to converge, partly driven by policy initiatives and partly by the increased balance between inward and outward flows to and from the mainland.
Although the onshore and offshore markets are still separate, the offshore market is likely to become more synchronised with the onshore market, as liquidity improves and interest rates become more similar — so the offshore market will be more closely linked to onshore cycles.
“An important catalyst is the fact that, of course, Chinese companies tap both markets. It will make sense too for multinational companies conducting Chinese business to raise funding in renminbi rather than US dollars,” said Raymond Gui, senior portfolio manager at Income Partners Asset Manager.
In addition, the offshore market is an appealing funding alternative to regional and municipal state-owned enterprises that might find themselves squeezed out of the onshore market by firms with closer links to central government, according to Ivan Chung, a senior credit officer in the project infrastructure finance group at Moody’s.
From an investor’s point of view, the renminbi is a “hot” currency, said Ken Hu, head of fixed income investments at BOC HK Asset Management. It should be compared to the yen 40 years ago rather than to other emerging Asian currencies. As Japan’s economy grew, so the yen increased its value by four times during those decades — the renminbi has only appreciated around 30% since 2005, so there is much further for it go. Another long-term development is the likely convergence of the offshore and onshore markets, and eventually the combined market will be as large and important as the Eurodollar market.
“There is also a similarity to the H-share market 20 years ago, when equity investors had to consider it an alternative way to gain Chinese exposure,” he added.
Also, the offshore market can give Asian investors incremental yield — yields of about 3.5% on offshore renminbi bonds provide a pick up over yields on Hong Kong, Singapore and Taiwan dollar bonds.
“To some extent, they replace the enhanced yield that used to be supplied by Australian dollar bonds,” said Sean Chang, head of Asian debt investment at Baring Asset Management in Hong Kong.
Poor liquidity is the biggest concern for investors — it is challenging to actually invest in the market, pointed out Suanjin Tan, portfolio manager for credit strategies in Asian fixed income at BlackRock.
But the increase in market size has led to more brokers participating, so dealing sizes have also increased (from Rmb15 million to Rmb25 million). Next, “we want tenors to be extended”, he said.
However, it is important not to exaggerate the significance of the offshore market: renminbi deposits make up just 10% of onshore deposits, and the domestic onshore corporate bond market is between Rmb5 trillion and Rmb6 trillion.
“Both issuers and investors should establish an early presence in the market. It will send the right message to regulators about the seriousness of their intentions, and also enhance their credentials among later participants,” said Goldman’s Lee.