The offshore renminbi bond market – also known as the CNH or dim sum market – began to see an increase in momentum in the first quarter of 2011, with around 20 bonds available in the market.
Fast forward to 2014 and there are almost 300 offshore RMB bonds available to investors.
Despite a three-year track record, obstacles remain if the offshore RMB bond market is to move beyond its traditional base of retail investors to attract significant capital from institutional investors.
Markit has recently partnered with Hang Seng Indexes Company to launch the new Hang Seng Markit iBoxx Offshore RMB Bond (HSM iBoxx) Index series.
Randolf Tantzscher, Markit’s director of indices for Asia Pacific, has observed some interesting findings in relation to trends in this market. He spoke to AsianInvestor about what Markit is seeing.
What trends are emerging in the offshore RMB bond market?
In terms of size, the offshore RMB bond market is still small at around Rmb500 billion ($81.6 billion), excluding certificates of deposit. But the market has doubled in size in each of the past three years, which is quite an achievement.
There are two broad constituents of the market: Chinese and non-Chinese companies issuing offshore RMB bonds – and they are very different. The Chinese component is higher yielding, more volatile and at 67% makes up the biggest part of the corporate section of the index.
High-yield bonds make up 30% of Chinese corporate dim sum issuance but only 24% of all corporate issuance within the index, including multinational companies.
And that’s logical. Issuing in offshore RMB rather than foreign currencies is a way for Chinese firms to internationalise some of their funding without having to worry about foreign exchange risk.
However, the makeup of the offshore RMB bond market is changing. Investment grade issuance by Chinese companies has been by far the fastest growing component this year and now accounts for 30% of the index, or around Rmb95 billion.
Chinese companies have always formed the biggest part of the offshore RMB bond market and we think this trend is likely to continue with the multinational component expected to shrink further over time.
One third, or around Rmb67 billion, of the corporate bond section of the HSM iBoxx index family comprises non-Chinese companies, but this year, less than a quarter of issuance has come from multinationals outside China.
What is holding back institutional investors from committing to the offshore RMB bond market?
The market is still young and liquidity in newer markets trails mature debt markets, like the US, which is perceived as the ‘norm’ by international institutional investors. The offshore RMB bond market is growing and liquidity is improving. In local currency terms in Asia, it’s now one of the more liquid corporate bond markets.
Having said that, the offshore RMB bond market still remains largely dominated by the retail space. Institutional investors will demand more liquidity, greater transparency and a longer track record before they fully embrace the market. They are also concerned about investing in bonds that have not been rated by the rating agencies.
If a significant proportion of dim sum bonds are unrated what reassurance can be offered to international institutional investors?
Unrated debt is more commonplace in Asia, and Asian investors have become accustomed to this. International investors from Europe and the US expect ratings and face the additional challenges of being less familiar with the Asia-Pacific markets and local issuers.
In terms of market capitalisation, 41% of the Chinese corporate bonds in our HSM iBoxx index are issued without a credit rating and 31% of offshore RMB Chinese firms are unrated (meaning neither the bonds nor the issuer are rated).
We consulted more than 15 asset managers and banks to develop a specific methodology for Markit’s indices to address the issue of unrated bonds. We assess each bond based on the spread at which it trades and categorize them as either investment grade or high yield.
From an index perspective, this is an objective and transparent approach to allow investors to assess the market’s view of the creditworthiness of the bonds in the index.
In addition, we include unrated debt at half of its notional value, which reflects the data issues and risk profiles of issuers. This has reduced the portion of unrated bonds within the HSM iBoxx Offshore RMB Corporates index to 24%.
However, we are not a ratings agency and are therefore not attempting to make rating judgements on the unrated offshore RMB bonds.
The question over the treatment of unrated bonds is not confined to the offshore RMB bond market as there are many unrated corporate bonds in local currency markets across Asia.
How will the offshore RMB bond market respond when access to the onshore China bond market improves over time?
I think the offshore RMB bond market is here to stay. Even if investors are increasingly encouraged to invest more funds in onshore bonds, they would have to grapple with considerably different data.
There are hundreds of issuers from companies not known outside China and many of these are not rated. Investors will struggle to access the right level of information upon which to base their decisions. The offshore market is like a window into this market for international investors.
Moving beyond transparency concerns, comparisons can be drawn with the eurodollar bond market, which is still going strong despite thriving domestic markets. This goes to show that as long as there are fundamental reasons for an offshore market to exist, it will continue to attract investor interest.
For more information, visit www.markit.com/HSMiBoxx