Dim sum bond market seen declining further as China improves onshore access
Beijing’s onshore market liberalisation is luring international issuers and investors
The significant liberalisation of access to China’s onshore bond market will continue to attract yuan denominated bond issuance and investment, ringing the death knell of the offshore market, according to analysts.
By the end of 2016, international investors’ total investments in the onshore bond market reached 779 billion yuan, markedly higher than their 554 billion yuan worth of investments in offshore yuan bonds.
“Dim sum bonds have never really served the intended purpose and will not be the solution going forward for a host of reasons,” said Brett McGonegal, chief executive of Capital Link International.
“The set up was plagued in early going by limited settlement options and agents thus limiting distribution and support to only the settlement banks. In addition, the limited use of proceeds and repatriation curtailed the corporate involvement,” he said.
When the yuan was appreciating, and access to China’s onshore bond market was severely curtailed, the dim sum market had a role. But those times are quickly passing, especially in terms of the current direction of the currency.
The onshore market “has a much larger pool of liquidity as well as trading and diversification opportunities [than the offshore], and as such, we expect offshore [yuan] bond issuance volume to continue its declining trend in 2017,” said Ivan Chung, a Moody’s associate managing director.
For international investors, China’s interbank bond market (CIBM) has also become more accessible.
“Reforms in the onshore bond market over the past year have improved disclosure and enhanced offshore investors’ access to the onshore market,” said Chung.
“We expect this will lead to more international investors expanding their investments beyond central government and policy bank bonds.”
Last March, the People’s Bank of China announced it would adjust the rules to allow almost all foreign institutional investors access, and in May detailed rules were issued about how that might work.
The yuan’s inclusion in the IMF’s special drawing rights basket in October, and a further raft of disclosure and governance regulations, are all additional factors that should attract attention from overseas investors.
If the CIBM is included in global benchmark bond indices in the near future, as is often speculated,
that would drive a considerable flow of international investments in CIBM for portfolio rebalancing and diversification.
International investors still only accounted for 1.2 per cent of the onshore bond market at the end of 2016, but Chung said this was a result of the CIBM being so large.
“Even if the number of foreign investors increase as we anticipate, they will still be small in percentage terms of a US$9 trillion market.”
Foreign banks have also started to get in on the act, and last week JP Morgan announced it was licensed to underwrite bonds in the CIBM, while Citi announced it was now licensed to act as a bond settlement agent. Both banks were the first US banks to achieve their respective licences.
The trend away from the dim sum market holds true for bond issuances as well. In 2016, offshore yuan bond issuance was only about 130 billion compared with annual issuance volume of 170 billion yuan in 2015 and almost 300 billion yuan in 2014.
In Moody’s quarterly yuan bonds monitor, the ratings agency said that growth in dim sum issuance, as the offshore market is known, would be driven by refinancing, and about 190 billion yuan of dim sum bonds will be due in 2017.
“Current capital control requirements will make it difficult for dim sum issuers with major operations in China (for example, Chinese property developers) to use their onshore funds to repay dim sum bonds. Thus, they are more likely to refinance in the dim sum market,” the report said, though it noted that due to potential for further yuan depreciation they may look to refinance in the US dollar market.
When it comes to the longer term future of the dim sum market Chung said: “The [yuan] is too small to need more than one large centre, and if liberalisation continues then I see further movement from the offshore market to the onshore. However, if there were different rules in Hong Kong, about taxation for example, that might make a difference.”
McGonegal is even less positive on its future. “Even when the product was “en vogue” it wasn’t really an adequate solution; fast forward to a easier flow of funds through regulation it’s quite safe to say the dim sum market has seen its glory days,” he said.