China expected to dominate regional market

China will dominate the region's US dollar-denominated debt markets next year as economic growth driven by domestic consumption boosts energy and real estate bonds, according to Pacific Investment Management Co (Pimco), the manager of the world's biggest bond fund.

Companies on the mainland and in Hong Kong have sold US$52.7 billion of notes this year, or a record 50 per cent of all US dollar securities in Asia outside Japan, the first time a single country has captured half of the region's US currency market in data dating back to 1999.

The yield premium on debentures from the mainland has shrunk 46 basis points in the past 12 months to 378 basis points, compared with a jump of 17 basis point for Asian credits, according to JP Morgan Chase.

"It's clear that the credit market's expansion will be driven from China," said Raja Mukherji, the Hong Kong-based head of Asian credit research at Pimco. "There are innumerable opportunities in China but investors have to differentiate between the Chinese credits. Fund managers really need to do their credit checks to assess whether they're being paid to take on the risk."

With urbanisation boosting spending and personal incomes growing, retail and consumer companies on the mainland were expected to sell more bonds next year, Pimco said in report last week.

Premier Li Keqiang is seeking to achieve a target of 7.5 per cent growth for this year, while cracking down on excessive borrowing by local governments, polluting industries and luxury property developers.

China is forecast to expand 7.7 per cent next year, more than three times faster than developed economies, according to International Monetary Fund world growth estimates released in July.

Mainland companies sold US$5.6 billion of bonds last month, more than twice as much as in August, data shows.

Issuance slowed after the Federal Reserve signalled it might begin tapering stimulus this year, sending dollar yields to a one-year high of 6.59 per cent in June.

News the United States central bank will maintain the size of its bond buying programme sent China's borrowing costs in dollars down 19.3 basis points on September 19, the steepest one-day drop since May.

As living standards on the mainland rise, demand for energy has increased, which is having a knock-on effect in bond markets, according to Pimco.

China National Offshore Oil Corp and China Uranium Development, both state-owned, raised US$1.9 billion between them last Thursday.

CNOOC, the country's largest offshore energy explorer, sold US$1.3 billion of notes at a spread of 185 basis points, while China Uranium, a unit of China General Nuclear Power, sold US$600 million of bonds at a spread of 220 basis points.

"Even within China's state-owned enterprises there's a lot of divergence," Mukherji said. "The SOEs of the future may not be the SOEs of today. If the model changes to a more returns-oriented economy versus a subsidised economy that's more export-driven, the outlook of certain SOEs will change, and you don't want to be caught on the wrong side."

In Asia's high-yield dollar market, Chinese firms make up about 55 per cent of this year's bond sales, with property developers accounting for 41 per cent.

"Many developers are keen to look for opportunities to tap the US dollar debt market," said Angus Hui, a fixed-income fund manager in Hong Kong at Schroder Investment Management. "The higher funding needs reflect a pickup of land-bank acquisition activities, and it makes sense for developers to term out their debt maturity profiles."

Junk debt sales in Asia this year set a record, with 76 transactions totalling more than US$30.4 billion, Pimco said.

Because people in China desired to hold property as a financial investment, the supply pipeline from builders would remain strong, it said.

New home prices in the mainland's four biggest cities climbed by the most since January 2011 in August, with Guangzhou up 19 per cent, Shenzhen 18 per cent and Beijing and Shanghai 15 per cent, the government said.

Beijing-based Modern Land China, which develops residential projects with energy-saving architecture, last week hired banks to arrange a series of investor meetings and a debut US dollar note offering could follow, according to a person familiar with the matter.

Dollar speculative-grade note yields in Asia averaged 8.03 per cent last week, compared with 6.72 per cent for similar-rated notes in the US, Bank of America Merrill Lynch data shows.

"The recent correction in the Asian high-yield market valuations has reduced risk within the sector and generated considerable potential value for new investors," said Tim Jagger, the lead portfolio manager for Asian high-yield debt at Aviva Investors Asia.

China overtook South Korea as the single largest issuer by country in JP Morgan's Asia Credit Index in February, according to Pimco.

Investors would prefer a broader selection of markets, said Lim Swee Ching, a Singapore-based credit analyst at Western Asset Management.

"From a diversification angle, the concentration of Chinese names in the credit new-issue market is likely not helpful," Lim said. "Investors are probably hoping for more variety but the situation is what it is."