Dim Sum bonds brace for impact as Beijing opens onshore bond market to global investors
Beijing’s opening up of the mainland onshore bond market for foreign investors is set to seriously hit the already weak dim sum bond market.
The People’s Bank of China last week announced it would allow foreign investors to invest in its onshore inter bond market which has been seen as a major liberalisation of the mainland market.
These investors are to include banks, insurers, securities firms, asset managers, pension funds and charitable funds without quota restrictions. The details on how it would work, such as the minimum holding period, are still to be announced.
At present, only investment firms that have the Qualified Foreign Institutional Investors (QFII) quota are allowed to invest in the onshore bond market. Retail or institutional investors who do not have a quota are left with few alternatives apart from the dim sum bond market, which are yuan bonds issued in Hong Kong and other markets.
“We think it may be a challenging period for the growth of dim sum bonds if investors get easy access to onshore China bonds,” said Binay Chandgothia, portfolio manager for multi-asset advisors of investment firm Principal Global Investors.
He said the move is a natural extension of China’s capital market liberalisation plans after the yuan, also called as renminbi, will be added into the International Monetary Fund’s Special Drawing Right basket from October this year alongside with US dollar, euro, yen and pound.
The SDR basket is tracked by many central banks and big fund houses. These investors would would need to purchase yuan assets and is believed to be a reason behind the latest PBOC move towards liberalisation. However, it appears clear that the new channels for onshore bonds will negatively impact demand for dim sum bonds.
The dim sum bonds issuance has declined substantially since last year due to the devaluation of the yuan. The value of the currency dropped 5.6 per cent against the US dollar last year after a 2.64 per cent drop in 2014. Dim sum bonds were highly sought after when the yuan appreciated against the US dollar from 2007 to 2013.
According to Thomson Reuters data, in the first two months of this year, there were only 12 dim sum bonds issued for a total of 2.28 billion yuan (HK$2.7 billion), representing a drop of 93 per cent from the same period of time last year. Total dim sum bond issuance last year tallied 167.46 billion yuan, reflecting a drop of 50.98 per cent from the 341.67 billion yuan raised in 2014.
Keith Pogson, a senior partner of accounting firm EY, said from the issuers’ point of view, the dim sum bond markets also faces competition of panda bonds, which are also yuan-denominated bonds. The mainland allows non-Chinese entities to issue these debt instruments in China’s onshore bond market.
Pogson said the competition between dim sum bonds and panda bonds will depend on whether the two markets end up having different users.
“Whilst we still have at least a technical difference between offshore yuan and onshore yuan, there will be different pools of capital and investors who will be looking at these different product,” he said.
“There may also be different interest rates, with the onshore rates being subject to the long term views and liquidity in the mainland banking system.”
Pogson however said panda bonds require companies to follow international accounting rules which would make it much more expensive and difficult for companies which are using the US GAAP filing companies. “These players may find it easier to access the dim sum bond market as an ongoing proxy,” he said.
Tim Lo, managing director of French private bank CIC Investor Services, said while the PBOC eased the conditions for the foreign investors to access in the onshore yuan bond market, the details and other conditions have not yet been made clear. He believes the amount for each foreign investors to invest may still be minimal.
“We should anticipate the co-existence of the onshore bond market and offshore dim sum bond market for a long while,” Lo said.
Andrew Fung, executive director of Hang Seng Bank, said only certain category of institutional investors are given access to the domestic bond market at this stage in a bid to ensure the yuan can perform the function of a reserve currency after entering IMF SDR basket.
“While the domestic bond market offer better liquidity and variety in Chinese issuers, I believe Dim Sum bonds can exist on specific features such as jurisdiction, common law base, periodical interest differential, and difference of issuer names, “ he added.