China’s bond market is expanding rapidly. Most bond issuers have noticed the change ever since the government liberalised its regulations in June.
As a multilateral bank owned by Brazil, Russia, India, China and South Africa, New Development Bank (NDB) is just one of the lenders to have noticed Beijing's committment to open up the capital markets.
“The further globalisation of China's capital markets is a core agenda for China’s next phase of reform,” Leslie Maasdorp, vice president and chief financial officer, told FinanceAsia in an exclusive interview.
The issuance of green bonds stands out as the structure to watch. China has committed to a substantial portfolio of new green projects in its infrastructure pipeline. And this is also a major part of the agenda for Shanghai-based multilateral bank NDB. After issuing its first green bond in 2016, the bank now intends to sell a second green bond of up to Rmb5 billion ($700 million) in the first half of next year on the back of a large volume of approved projects in China with green credentials, Maasdorp said.
Thanks to international ratings from global agencies, NDB's second green bond is likely to gain more attention from international investors. Fitch Ratings affirmed its AA+ rating in July and the bank also obtained an AAA international rating from Japan Credit Rating Agency last week, which will give it more credibility as it tries to raise money possibly in USD or Euro, according to Maasdorp.
NDB feels that the Chinese bond market is gradually opening up. China is aggressively pushing Bond Connect to attract more international investment via the Hong Kong Stock Exchange. HKEX said that international investors on Bond Connect surpassed 1,038 at the end of the first half, almost double the figure from the same period last year.
China is trying to internationalise its currency, and opening up its capital markets is a crucial part of the plan. “We are going to see a very real opening-up, and expansion in the Chinese financial and capital markets in the years to come. This will lead to significant capital inflows into the Chinese bond markets and boost further growth,” Maasdorp said.
The following conversation with Maasdorp has been edited for brevity and clarity.
Q How has the bank changed since it was founded?
A I remember those early days very clearly as we were a complete startup. We had a meeting in Russia during the BRICS summit in July 2015 where the official launch of the bank was announced. Our loan book has grown from zero then to $10.4 billion today. Now we have 160 staff and aim to grow our headcount to 230 by the end of 2019.
The bank is now fully accepted and established in the global market of multilateral banks. We are well on our way to becoming a truly global financial institution.
Q How is New Development Bank changing now?
A Since 2017, we have been growing our portfolio so that we can lend to private companies too. The construction of our permanent headquarters is well on its way. We plan to make this building in Shanghai a hub of global finance. The idea is that the building can be a hub of parts of the World Bank, Asian Infrastructure Investment Bank, Asian Development Bank, European Investment Bank and others. Everybody will have offices here.
Q What has the bank achieved over the past year?
A The most important achievement is the growth in the loan book. If you look at the first year, the bank provided $1.5 billion of loans. By April 2016, we had announced $1.5 billion of renewable energy projects, one in each of the five countries. But today, we anticipate that we're going to provide between $7.5 and $8 billion loans this year.
Secondly, we have expanded our regional presence. We opened a regional office in South Africa last year and we are going to open an office in Russia and Brazil later this year to deepen the global footprint of the bank in all the BRICS countries.
And the Japan Credit Rating Agency has just awarded us a triple-A international rating, which is our first triple-A international credit rating. JCR is the only Japanese rating agency recognised in the US, UK and European Union.
Asian investors will now accept us more easily which gives us recognition from the domestic and international markets. NDB will target Japanese institutions and do roadshows with Japanese institutions to encourage them to buy our bonds.
We already have a Japanese institution, Mizuho, that bought our last RMB bond. The reason that Japanese institutions are interested in us is that we are the highest-rated institution issuing in the interbank bond market in China.
The bank is deepening and strengthening its green and sustainable financing credentials. We are actively looking for projects to make sure our portfolio represents green assets.
In July this year, we also registered for a R10 billion ($660 million) bond programme in South Africa. We intend to launch the first issuance under that programme by the fourth quarter of the year.
Q What is the bank’s plan on green bond issuance?
A We registered an Rmb10 billion bond programme at the beginning of the year. There is a strong likelihood that the bank will, as part of its current RMB bond programme, issue a bond in a green format under the green guidelines of the PBOC.
The bank will issue its next bond In the first half of 2020 totalling about Rmb5 billion.
This is because there is a strong pipeline of green projects that the Chinese government has put forward. It is making provinces and local governments work on environmental waste management, cleaning up rivers, water resources, and all of those are creating green projects.
Q How will future bond issuance differ from the previous one?
A In the first bond, we swapped some of the proceeds into US dollars. But our approach now is to use all of the proceeds [onshore] because there is strong demand.
We had only been established a year previously and we didn't have an international credit rating which meant that we couldn't raise money anywhere else in the world.
But now, thanks to the panda bond that we issued in February this year, we keep all of the proceeds in RMB. We are working on establishing bond programmes in other BRICS countries.
Q Are you concerned about default rates in some emerging markets?
A Our loans have a sovereign guarantee which means that the government will guarantee the payment.
Right now, the bank is cutting its sovereign guarantee portfolio from 100% to 85%. About 15% of our loans will go to non-sovereign operations or the private sector. We want to get more private sector players involved in infrastructure in the next year as we expand.
We want to lend more to the private sector and to co-finance projects. There is still a massive demand for new infrastructure because BRICS countries are still urbanising. We have a cap that only 30% of our loans can go to the private sector.
Q Is there more risk in increasing the loans to the private sector?
A We expose ourselves to more risk. But we fulfil another objective by crowding in more funding into the private sector. We are still comfortable that 70% of the book is very protected with sovereign guarantees.
Q How do you feel that the environment has changed for panda bond issuance?
A With Bond Connect, more institutions are more comfortable buying into the interbank bond market. And we are actively promoting that channel. More and more global institutions are comfortable investing in the Hong Kong regulatory regime.
China is actively promoting the internationalisation of the RMB and also actively promoting greater foreign participation in the interbank bond market. China is looking at how to attract more people into the Chinese bond market, as foreign participation is very low at present.
When you look at the world bond markets, when you take Japan, South Korea, indeed any Asian country, you will see that China is a complete outlier. Only about 2% of the Chinese interbank bond market is held by foreigners, and most of the bonds in China are held by domestic institutions. In any other Asian country foreign participation accounts for between 10% and 20% of the domestic bond market. In the US the proportion is 40%.
China has huge scope to increase the size of foreign participation in the domestic market, to globalise Chinese financial capital markets.
Q Are you expecting more international participation in your issuance next year?
A We do want to have a more diversified investor base. It boosts the liquidity and it also helps with the pricing of the bond.
We are likely to see an increase in the proportion of international investors buying into our next bond.
Q Will recent market volatility affect pricing?
A These are business cycles, but we don't look at the world like that. We are not driven by short term financial considerations. Right now, the global economy is going through some tough challenges with trade tensions leading to economic instability. But this does not impact our capacity to increase our loan book, because we take a 10 to 15 year view when we do our financial models.
Q Do you have any update on adding new member countries?
A We are likely to see a much clearer direction for the expansion of the New Development Bank at the BRICS summit in November this year. We have determined the criteria and the procedures for new members.
The bank will include both borrowing as well as non-borrowing members and other developed countries. In the future, the BRICS countries will dilute the equity from 100% at the moment, which is 20% each. Once the membership expansion has been completed, each founding member will have an 11% share. That gives the five countries 55% with another 25% for other emerging markets – large emerging market economies that need infrastructure. The final 20% will be for non-borrowing members; they should be developed countries.
Q How do you view the Belt and Road Initiatives (BRI) at a time when emerging markets are all facing challenges?
A It is an ambitious project that aims at regional connectivity and regional integration. This is the natural path for countries to search for ways to connect road, rail, port and power infrastructure with their neighbours and in that way facilitate greater trade and investment. This is why the Belt and Road Initiative is a very important initiative, but we do not technically fund BRI projects. We would finance a project like that which involves at least one or two of our member countries.
It is unfortunate that BRI has been viewed as an instrument of Chinese political influence. But in the end, the most important thing is that projects that are financed have to be commercially viable.