Institutional investors will have more choice of benchmarks when designing their RMB fixed-income funds as HSBC launches a CNH bond index, while US bank Citi is primed to follow suit. 

HSBC Global Research unveiled yesterday the launch of its first CNH bond index – the HSBC Offshore Renminbi (RMB) Bond Index, which caters to institutional investors holding CNH bonds and certificates of deposit (CDs).

Meanwhile, Citi is also readying its Dim Sum Bond Index to track the performance of CNH bonds with a fixed-rate coupon, minimum maturity of one year and minimum outstanding size of Rmb1 billion. The outstanding amount of the index is about Rmb30 billion (US$4.7 billion).

Zhang Zhiming, HSBC’s head of China research, notes that the purpose of launching its index is to capture the investment returns of CNH bonds, which have attracted increasing institutional investor participation.

He explains that CNH bonds exhibit different yield patterns from onshore RMB bonds. Due to the tightening policy adopted by the Chinese government to fight inflation, the onshore RMB bond yield has been lifted; but on the other side, overseas investors’ assumption of RMB appreciation, which creates a huge demand for RMB denominated assets, bids down the yield of CNH bonds.

Forecasting that the offshore RMB bond market will hit Rmb100 billion by the end of this year, HSBC expects the CNH Index to further support the rapid development of the CNH bond market.

Starting from next month, HSBC’s CNH index will be included in the Asian Local Bond Index (Albi), accounting for 1% of its overall weighting and slightly over 10% of its China sector.

In light of this, Zhang expects institutional investors to adopt the CNH index as the benchmark for their RMB fixed-income funds, since currently about 150 funds investing in local currency bonds are using Albi as the benchmark.

As of March 17 this year, the HSBC CNH index tracks the total return performance of 29 offshore RMB fixed-income instruments with minimum amount outstanding of Rmb500 million and minimum one-year remaining to maturity.

Last December, Bank of China (Hong Kong) launched its Offshore RMB Bond Index, the first of its kind in Hong Kong, which includes both CNH and synthetic bonds with a minimum six months of remaining maturity and minimum outstanding face value of Rmb500 million.

As of yesterday, the index includes 35 constituent offshore RMB bonds worth about Rmb72 billion, or around 90% of the market universe in terms of value.

Compared with the BOCHK Offshore RMB Bond Index, HSBC’s CNH index includes CDs but excludes floating coupons, retail bonds and synthetic bonds, which are denominated in RMB but settled in US dollars.

HSBC views synthetic bonds as a different product from CNH bonds, with a distinctively different issuer and investor base, and notes that “CDs compromise a significant portion of the offshore RMB bond market” with trading activities, pricing and market dynamics similar to CNH bonds.

Becky Liu, HSBC fixed-income strategist, explains that most issuers of existing synthetic bonds are property developers, whereas CNH bonds are issued by government agencies, financial institutions and multinational companies. In terms of investor bases, CNH bonds are held by banks and large institutional investors, while synthetic bonds are favored by private banking clients.

The base of HSBC’s CNH index was 100 on December 31 last year, representing market capitalisation of Rmb29.9 billion. As of March 8, the market capitalisation had grown to Rmb42.2 billion with total return of 2.02% in US dollar terms and 1.49% in RMB terms.

As of March this year, the HSBC CNH Index covers 57% of the total outstanding RMB-denominated and RMB-settled bonds in the offshore market, and 76% of total institutional issuance.