The offshore renminbi (CNH) bond market will expand over 50% to hit Rmb350 billion by the end of this year – breaking the chunky $50 billion barrier for the first time, predicts Deutsche Bank.
While that represents a slowdown in growth – the CNH bond market expanded 375% in 2011 to Rmb240 billion – Deutsche’s market outlook can still be viewed as bullish.
The German bank itself overestimated the expansion of the CNH market last year, revising up its initial Rmb750 billion prediction for CNH deposits to Rmb1 trillion in the middle of the year.
But the market was pegged back in the second half, with headwinds including corporate governance issues such as Sino-Forest, macro economists talking about China’s potential hard landing and general investor fears over the eurozone debt crisis.
Yet Vishal Goenka, head of currency credit trading for Asia based in Singapore, stresses that Deutsche remains bullish on CNH bond market growth. It also forecasts that the CNH deposit base will more than double from Rmb700 billion at the end of December to Rmb1.5 trillion by the end of this year.
Goenka is not alone in having a positive market outlook. Last week Bill Maldonado, Asia-Pacific CIO and equities strategy CIO for HSBC Global Asset Management, dismissed talk about declining interest and issuance in Hong Kong’s dim sum bond market.
“We don’t see that at all, we see a lot of appetite for CNH assets and we see a lot of interest from a diverse range of issuers coming into this market,” he says. “Although there has been a hiatus, we would expect issues in the market to be strong again at some point in 2012.”
These forecasts come as AsianInvestor and sister publication FinanceAsia prepare to host our 3rd annual RMB Rising conference today at the Renaissance Harbourview Hotel in Hong Kong.
Goenka offers two key reasons for a continued expansion of the offshore renminbi market: likely currency appreciation (Deutsche is predicting 3.5% in 2012) and the opportunity for foreign investors without a QFII quota to gain access to China.
“We think the international component of this [CNH] bond market is going to grow rapidly in 2012,” states Goenka, noting that it stands at around 10% of the total at present (Chinese bank issuers are at 32%, Chinese government and sovereign issuers at 23%).
He believes 2012 will be the year CNH establishes itself as an international market, predicting bond issuance will take a similar trajectory to that of the Eurobond market after the euro was issued in 1999/2000.
“The size of the market and potential growth is good enough for us to believe that this is going to be the biggest international market after the dollar and the euro in the years to come,” he says.
He blames the slowdown last year on perceived CNH foreign exchange volatility, with the reversal in cross-currency swap curves dissuading some international investors from entering.
But he stresses that the most important thing to happen in the second half of last year was yield convergence, with the offshore yields of Chinese issuers converging with onshore yields as well as high-yield dollar issuance.
“This [convergence] brought a whole new investor base into the market in terms of insurance companies in Asia who had not found the market attractive at the beginning of the year, when there was a demand/supply imbalance,” Goenka notes.
He expects to see more and more products launched during the year, including ETFs, bringing more money into the underlying CNH market. He also believes that credit research on CNH issuers will become a key area for 2012.
“What we learned from 2011 is that investors who were in this game to invest in CNH from an FX appreciation point of view may not have paid enough attention to underlying exposure,” he explains. “What you will see in 2012 is more resources allocated from the buy- and sell-side towards research in the underlying credits.”
He also expects market liquidity to play an increasingly important role in what is still a nascent market, with the demand/supply dynamics having changed from the first half of 2011.
In terms of key risks to Deutsche’s outlook, Goenka points to any further problems surrounding corporate governance or a credit event in an underlying issuer, although this he acknowledges as a global phenomenon far from exclusive to the offshore renminbi market.