China corporate bond market set to take off, say fund managers

MFC Global Investment Management and Aberdeen Asset Management are among those with strategies targeting renminbi-denominated bonds issued in both mainland China and Hong Kong.
China corporate bond market set to take off, say fund managers

"China is the most exciting fixed-income market in Asia, and possibly the world,” says Wang Yu-Ming, the new regional head of fixed-income at MFC Global Investment Management in Hong Kong.

The country’s bond market has grown from $62 billion in late 1996 to $2.4 trillion by the end of 2009, accounting for over half of Asia ex-Japan’s $4.2 trillion in bond assets at that time, according to the Asian Development Bank. And it is growing fast, particularly on the corporate-bond side.

That explains why MFC GIM allocated 30% of its $200 million qualified foreign institutional investor (QFII) quota to its RMB bond fund, with the remainder to be used for its China A-share fund.

This a rare move, says Hong Kong-based Wang, because most QFII funds are typically A-share dedicated. However, it may become an increasingly common trend; Aberdeen Asset Management, for instance, plans to allocate the bulk of its upcoming QFII quota to fixed income, as reported by AsianInvestor yesterday.

MFC GIM, a subsidiary of Canadian insurer Manulife, targets both institutional and retail investors with the new bond fund. The firm launched the institutional share class of the fund last week and will market it worldwide. It is awaiting approval on the retail share class – which will be sold solely in Hong Kong – from the Securities and Futures Commission. Demand is coming from countries both within and outside Asia, says Wang.

Moreover, the moves to relax renminbi rules in Hong Kong have meant it’s very timely for MFC GIM to have an RMB bond fund offering, says Wang. Still, “real detail is yet to come from the regulators”, he adds, echoing recent comments made by other fund managers. “[The regulators] admit they are some way from having concrete rules.

“Clearly Hong Kong is already an offshore RMB centre; there are lot of RMB accounts there -- but where do they all invest?” says Wang. “Not into China, unless they have a quota, and RMB-denominated bonds are very scarce.”

Still, Hong Kong corporates are as likely to issue in RMB as in Hong Kong dollar, especially if they do business on the mainland, because that way they can avoid hedging costs, he says. “That’s one motivation for relaxing the rules – to make it easier for China-based exporters and importers to manage currency risk. So we’ll see large mainland companies coming here to issue RMB bonds.”

Corporate bonds represent around 15% of the Chinese bond market at present, according to the Asian Development Bank, but the growth rate is much faster than that for sovereign bond assets (see graphs below). The government has been encouraging lending to shift away from the typical loan market to capital-market strategies, notes Wang.



Source: Asian Development Bank (Asian Bond Monitor, March 2010)

Aberdeen Asset Management is also optimistic about the development of the market, both offshore and onshore.

China’s onshore bond market is mostly sovereign-related with plans to develop a more active corporate bond market in the years ahead, according to Aberdeen's Asia fixed-income team. “As this market grows, we would expect there to be opportunities that offer interesting risk/reward profiles,” a team spokesman tells AsianInvestor. “As an investor, one would also, of course, benefit from the anticipated RMB appreciation that one would not get with US dollar bonds issued by Chinese companies.”

As for China’s offshore bond market, RMB36 billion of bonds has so far been sold in Hong Kong. Deutsche Bank expects the amount of RMB bonds issued in Hong Kong to double from RMB23.4 billion this year to RMB46.3 billion in 2015, equating to a CAGR of 15%.

Most of the issuers to date have been banks, says the Aberdeen spokesman, though the most recent issuer was Hopewell Highway Infrastructure. “Looking ahead, we would expect non-bank corporates to show the fastest growth, though this growth is off a low, or rather non-existent base,” he says. “In RMB terms, issues by banks are likely to continue to dominate the market.”

MFC GIM has an early-mover advantage in China fixed income, says Wang. Manulife has operated an insurance joint venture onshore for 14 years, and all its assets have been managed in-house. “So we are very familiar with the rise of China’s sovereign bond market, as well as the unguaranteed, corporate bond market," says Wang.

And since the international credit rating agencies have not really got into the Chinese corporate bond market, he adds, there is very little credit expertise in that space, which means MFC has a significant edge.

Wang took up his new role in July, to replace Victoria Ip-Cheung, who left the company at the end of May. Reporting locally to Michael Dommermuth, head of Asia investments at MFC GIM, Wang oversees a team of more than 30 portfolio managers and analysts across 10 locations in Asia.

Previously MFC’s head of North Asia investments, he oversaw the integration of the company’s Taiwan asset-management operation and the launch of a Taiwan investment-grade bond fund by Manulife Asset Management. He also played an important role in the acquisition of a 49% stake in Manulife Teda, the firm’s joint-venture asset-management company in China, set up late last year.

MFC GIM is seeking a replacement for Wang, and in the meantime he will look after his old responsibilities.

Before joining MFC, Wang spent nine years at Wachovia Corporation in New York and Hong Kong. There he created and oversaw a global structured credit products operation, before moving to Hong Kong to become Asia head of the company’s global markets and investment banking division.

Wang also co-founded Structured Credit Partners in New York in 1998. As chief investment officer, he oversaw the creation and management of commercial real estate collateralised debt obligation portfolios.

MFC Global Investment Management manages some $31 billion in assets in Asia (including Japan) as at June 30, of which $23 billion is in fixed-income assets.  

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