US-based manager Invesco is brainstorming product permutations for dim-sum bonds to cater to differing risk appetites in the belief that the market’s appeal will not fade despite a growing array of onshore instruments.
Desmond Ng, the firm’s head of sales and marketing for Asia ex-Japan and chief operating officer, says this is partly in expectation of a regulatory change to allow Hong Kong Mandatory Provident Fund, the statutory retirement contribution system, to include offshore renminbi-denominated (CNH) bonds.
Ng says his team has been structuring investment plans in recent months pairing offshore dim-sum bonds with onshore equity and bonds. Its onshore credit research capability benefits from collaboration with its joint-venture Chinese asset management firm, Invesco Great Wall.
“We are capable of devising various investment strategies that could be in the form of a combination of dim-sum and equities – which gives investors a flavour of a similar product they could invest into under the RQFII [renminbi-denominated qualified foreign institutional investor] scheme,” says Ng.
The RQFII scheme was launched in 2011 to enable offshore Chinese asset managers and securities firms to invest CNH back into onshore securities.
To begin with, Chinese managers were restricted to investing no less than 80% of RQFII fund assets into onshore fixed income, and no more than 20% into A-shares.
This year four of these RQFII managers were also awarded quotas to issue renminbi-denominated ETFs tracking A-shares and list them on the Hong Kong stock exchange.
Ng believes dim-sum bonds have come of age as an asset class. The first dim-sum was issued by China Development Bank five years ago, but there has been a broadening of issuers to include multinationals raising CNH for operational needs – or simply to tap cheaper US dollar funding by converting the proceeds from CNH, when cross-currency swap rates are favourable.
“Within the range of China capability that we have, and going higher up the risk spectrum, we could also structure retirement plans that combine both onshore and offshore Chinese equities,” says Ng.
Invesco has obtained $350 million in QFII quota via three tranches since 2005, allowing it to invest directly into China’s onshore equities and interbank bond market.
Ng sees a very different risk-return profile for dim-sum bonds versus onshore interbank bonds, with a view to contrasting laws (such as bankruptcy) governing dim-sum and onshore bonds, which adhere to PRC law.
Their tax treatment also differs, given that dim-sum bond investors are not subject to the 25% withholding tax imposed on foreigners investing into China’s interbank bond market.
Ng notes that over the last two years his team has been diverting more resources to its business lines serving retail and pension fund clients, in line with demand to access China’s onshore market.
Ng’s team has also been engaging with the Mandatory Provident Fund Authority in its fine-tuning of investment schemes suitable to give the city’s pension savers access to dim-sum bonds, in association with Invesco’s trustee, Bankers Consortium Trust.
At the same time his team has been working with sovereign wealth funds in the region to pick the right China-related credit opportunities, with Ng expressing the belief that demand for dim sum from institutional investors will remain strong.
According to a research report on dim-sum bonds by Standard Chartered, as at October 3 this year total issuance stood at Rmb218 billion ($34.7 billion), surpassing the Rmb185 issued for the whole of 2011.
The bank says the total outstanding in dim-sum bond issuance (including certificates of deposits issued by banks) stands at Rmb353 billion.