Investor confidence in Hong Kong’s CNH market appears to be gathering pace on the back of a rapid rise in bond issuance and a sharp escalation in secondary market trading.

Already this year an estimated CNH37 billion ($5.7 billion) in bonds have been issued in Hong Kong, including a plethora of high-yield deals, taking the total market size to almost CNH100 billion. Of that, some CNH17 billion has been issued this month alone.

Deutsche Bank is forecasting that the market will double to CNH200 billion ($30.8 billion) by the end of this year, with the firm’s Greater China chief economist Jun Ma having tipped CNH deposits to rise to CNH2 trillion by the end of 2012, from CNH407 billion at present.

“We have heard there is a huge pipeline [of bond deals] coming and issuers want to be quick through the door, so we have seen a deluge of deals this year and we are seeing more high-yield issuers,” says Vishal Goenka, head of local currency credit for Asia at Deutsche Bank in Singapore.

“Credit is clearly the hot-spot in CNH at the moment. We are very bullish on the growth of the CNH deposit base, and chasing this deposit base is where we are going to see growth in the CNH bond market.”

Six of the top 10 CNH bond deals this year have been high-yield, topped by a dual tranche $1.1 billion issue by Hong Kong firm Big Will Investments on April 20, according to data provider Dealogic.

Deutsche research shows financials constitute almost 50% of outstanding CNH bonds, while Chinese government bonds account for 28%. Geographically, Chinese issuers dominate the CNH bond arena with a 61% market share, followed by Hong Kong issuers with 20%.

“As this market grows, our expectation is that more issuance is going to come from third-party, international issuers, if and when they can swap the money back into other currencies,” adds Goenka.

The government is widely expected to monitor the deluge of issuance from Chinese companies tightly, while opening up the market more to global issuers.


The bank also notes that weekly trading volumes in CNH bonds have exploded this month and are 10-14 times what they were in the first week of February (click on graph).

“The secondary market was very small and quiet in January and February, but volumes have shot up in April and we see this trajectory going forward,” says Goenka.

“I think a lot of investors are finding comfort to access markets through the secondary [market] route as well now. There is more and more confidence on the secondary side for investment.”

He puts a lot of this activity down to portfolio rebalancing, given bond market repricing that has occurred due to the flood of issuance.

“People are using that as an opportunity to rebalance, get out of one issue and into another, or to switch secondaries depending on how their credit view changes,” he adds. “That kind of portfolio rebalancing did not exist two months ago, but it is possible now because of the tremendous growth of the secondary market.”

He confirms Deutsche Bank has been in discussions with asset managers in recent weeks who are seeking to construct dedicated CNH credit portfolios, mostly retail orientated both in Hong Kong and Singapore. These consist of a mix of primary and secondary market investments.

“Some people already have funds which are open at the moment and awaiting closure and some asset managers are looking at launching in the very near future,” he adds. “I think given the huge amount of new [CNH bond] issuance we are seeing, it is relatively easier now for asset managers to tap the primary side, or gain access to deals led by syndicate desks across houses.

“It is very different to how it was just two months ago, when if you saw a CNH bond you just grabbed it because you knew it was going to go up. This deluge of issuance makes access easier and is a good thing for the development of the market.”

He lists future investable product opportunities as CNH loans, CNH bond indices, CNH bond ETFs and options on CNH bond ETFs.

“We are working on different kinds of assets including bond indices and ETFs, and that is where the growth on the CNH credit side is going to continue,” he says.

“For institutional investors, they will have to start looking at this market soon as it grows bigger and to dedicate resources to credit analysis rather than just see CNH as an FX play.

“For the medium and longer term, growth in the CNH asset pool will also come from the equity IPO side.”

Cheung Kong’s Hui Xian Reit is the only CNH IPO to have hit the market so far. It raised $1.6 billion and is set to start trading today.

If the listing is successful, it is bound to be followed by others. A number of companies are understood to be looking to launch CNH-denominated IPOs, mostly Reits.