Investors coming back for offshore yuan bonds despite default fears

More defaults are inevitable in China's bond market but most issuers still maintain pricing power due to ample funding channels and policymakers' easing measures, market players say.

The value of dim sum bond issuance this year is about 50 per cent less than that of the same period last year, reflecting investor jitters after a number of bond defaults, both onshore and offshore.

While more defaults are likely, investors and issuers are shrugging off the negative impact and are coming back to the market, said Clifford Lee, head of fixed income at DBS.

"Defaults will happen. But the good thing is that you will see the market get used to it and price it in," said Lee, adding that a major deal could be completed by the end of this month to kick-start the market. He did not disclose the name of the issuer.

In April, the average yield of offshore yuan bonds declined 35 basis points, the biggest drop in 20 months, according to HSBC. As a result, the total return in US dollars of overall dim sum bonds erased the 0.2 per cent loss in the first quarter to record a 1.1 per cent gain in the first four months this year.

"Maybe after there is a default, there is higher demand for higher return for risks. But it can't be a one-player decision; it's a market decision," Lee said. "[The issuers] see the markets as choppy with some near-term risks that are coming up. They could pull back the borrowings and go back to the banks. Investors then have to ask for lower yield and the market restarts from there."