Institutional investors are being attracted to the maturing $25 billion dim-sum bond market as they can bet on a broader array of issuers with diversity in yields based on credit fundamentals.
Now renminbi appreciation is no longer taken for granted – the RMB has depreciated 0.5% against the dollar this year compared with a 30% surge since 2005 when the central bank ended the peg to the greenback – investors including insurers, asset managers and banks are turning to the five-year-old market for potential value.
This is a much-needed sign of the market's growing maturity and stands in stark contrast to the past, when offshore renminbi (CNH) bonds mostly appealed to retail investors as a one-way appreciation bet.
Suanjin Tan, director and Asia fixed income portfolio manager for BlackRock in Singapore, says it may look to create new CNH bond funds, having launched its first in November last year tracking the HSBC offshore renminbi bond index.
“It took us a while to launch our first dim-sum bond fund as we realised that investors were placing too much focus on FX appreciation and they did not have enough understanding about the credit fundamentals of the issuers we saw in the market,” he reflects.
His team has opted to wait until it feels the market has enough diversity, and investors have appreciation of the credit risks, to ensure they are likely to be compensated appropriately for the level of credit risk, instead of relying on appreciation for returns.
When sizing up dim-sum bonds, Tan and his team assess issuer fundamentals and where the bonds should be priced relative to the sovereign curve, formed by various finance ministry CNH issuances since the start of the dim-sum bond market in 2007. They will also look at comparable bonds in both the dim-sum and US dollar markets to gain a full picture of an issuer’s credit quality.
The maiden dim-sum bond was issued by China Development Bank targeting retail investors only. But the market has since evolved, with primary market issuance balanced between corporate and bank bonds to date this year.
According to data from Credit Agricole CIB, more issuers are also being rated: year-to-date 2% of issuers are triple-A rated, and 54% are double-A rated. That compares with 1% and 21%, respectively, for all rated dim-sum bonds issued last year. About 75% of outstanding issues were issued with tenors of three years or less.
Benjamin Rudd, head of overseas investment for Ping An of China Asset Management (Hong Kong), says there has been more interest from institutional investors, picking up dim-sum credits based on criteria such as credit ratings.
“This is good news as part of the proper market development should see credit analysis and credit trends being considered by investors,” he says.
Meanwhile, Rudd notes that the performance of dim-sum bond funds are also showing diversion in yield, given the greater number of issues of varying durations this year compared with a year ago.
“The diversion in performance is a reflection of the fact that there is enough liquidity that allows fund managers to change their perspective and positions on an on-going basis,” says Rudd.
Asian investors, especially those in Hong Kong, represent the largest investor base and typically take up 65-80% of a CNH bond issue.
When China Development Bank issued a 15-year dim-sum bond this January, raising Rmb1.5 billion at a 4.2% yield, 75% of the subscriber base was insurance firms, finds Credit Agricole CIB.
Issuers are becoming increasingly diverse, as those with US dollar funding needs benefit from the lower cost of funding after swapping CNH back to dollars.
Frances Cheung, senior strategist for Asia ex-Japan at Credit Agricole CIB, explains that the high CNH cross-currency swap rate, at 2.2% for a three-year swap, means that when an issuer swaps RMB bond proceeds back to US dollars, it can achieve a lower cost of funding compared with issuing US dollar bonds directly.
Theoretically, the higher the CNH cross-currency swap rate, the better for issuers looking to raise dollars via the dim-sum market, since during the term of the swap it will receive the CNH swap rate and pay US dollar Libor back to the swap counterparty. Ultimately, of course, the total cost of funding also depends on the coupon level that an issuer promised investors.
As a further sign that the market could attract a greater variety of investors, including exchange-traded funds, this month Deutsche Bank partnered S&P Dow Jones Indices in co-branding its existing offshore Renminbi Bond Index Tracker (Orbit), tracking CNH bonds and certificates of deposit with a minimum issuance size of CNH1 billion and at least 12 months to maturity.