Bonds are king in Hong Kong market as investors lose appetite for IPOs
In contrast to trend before the financial crisis, mainland issuers raise US$70.3b in offshore debt so far this year, far outstripping equities
The amount of equity raised in Hong Kong in the first half of this year has been just a third of the volume of offshore bonds from mainland companies in the same period, according to fresh industry data out today.
That is in stark contrast to just seven years ago, before the global financial crisis and rounds of quantitative easing kicked in, when interest rates were not next to zero and the mainland's story of sustained, miraculous economic growth was fully intact.
In 2007, mainland offshore debt issuance was less than a tenth of the funds raised on the Hong Kong stock exchange, almost entirely mainland issuers.
Mainland issuers raised US$70.3 billion in offshore debt in the first half of this year, mostly through Hong Kong, according to Thomson Reuters data.
The dim sum bond market continues to set a stellar pace, with issuance volumes in the first half already 9 per cent more than what was raised all of last year.
Hong Kong continues to be a major funding centre for China Inc but the capital just happens to be in the form of bonds, notwithstanding the city's historic role as an equities hub.
"China bond issuance is up about 20 per cent," said Jacob Gearhart, Deutsche Bank's Asian head of global risk syndicate. "I don't think anyone expected that in a year that was supposed to be about higher interest rates and the great rotation into equities, especially in light of more negative sentiment on the Chinese economy."
Initial public offering issuance on the Hong Kong exchange did double in the first half, year on year, but it was coming off a low base, with the first six months of last year a particularly fallow period for new listings.
The slower listings market means there are now fewer lock-ups expiring, damping the equity follow-on market, with volumes down by a third compared with the first half of last year.
"It was incredibly busy in the first half of 2013 [for block activity], with so many companies having IPO lock-ups expiring," said Damien Brosnan, UBS's head of equity syndicate in Asia. "Block activity in the first half of this year has been lower."
The bond market's resilience is impressive considering that the previous engine for growth in the market - high-yield bonds from the mainland property sector - is sputtering. High-grade mainland property issuers, banks and energy firms have stepped into their place.
"A number of [mainland] property developers tapped the offshore markets from January to the beginning of March," said David Yim, the head of North Asia debt capital markets at RBS. "Issue volume dropped since then due to concern over the property market cooling down and a default by a small onshore property company. Investors … would like to see more supply of high-yield assets from the non-property sector."
The convertible bond market is also back after a long slumber, helped by low interest rates and rising share prices for certain sectors, such as technology.
Greater China capital markets also saw increasing interest among investors in taking longer-dated debt from high-grade names in the first half, to increase yield. But the multi-year trend remains keen appetite for bonds - driven by interest in low interest rates and investors' desire for safe, inflation-beating yield - and diminishing interest in equities.