Asia Pacific (APAC) investors are upbeat about the growth of the renminbi (RMB) onshore and offshore – aka ‘dim sum’ – bond markets, according to a regional cross-sector investor survey by Fitch Ratings. The credit ratings agency (CRA) reports that investor optimism in the dim sum market has remained intact despite the drop in corporate issuance this year.
Fitch conducted the survey between 20 August and 30 September, interviewing 72 senior investors in the APAC region, including asset management companies, sovereign wealth funds, insurance companies, pension funds, wealth managers, banks and hedge funds.
Seventy-seven per cent of survey participants expected both the on- and off-shore bond market to increase by between 25% and 50% in the year ahead. This optimism was accompanied by 55% of respondents highlighting the Chinese offshore yuan’s (CNH) appreciation potential as a key driver of interest in local-currency markets – a stronger level of currency confidence than for all other regional bond markets.
Investor optimism has been borne out by the robust dim sum issuance in the first nine months of 2013 when it rose to CNH41bn, up 70% from CNH24bn for the whole of 2012, based on Bloomberg data.
Investor optimism and market buoyancy masks one potentially adverse trend in the dim sum market: the year-to-date increase in gross issuance has been driven entirely by financial institutions (FIs), which accounted for CNH33bn) and in particular a doubling of issuance by Chinese financial entities (to CNH27bn). Excluding this, all other dim sum issuance was considerably lower (CNH8.4bn) than last year (CNH11.4bn).
The drop in issuance by corporations, which includes both Chinese entities as well as multinationals, was particularly sharp (down 38% year-on-year). The drop in all other debt-raising activity was precipitated by much lower foreign quasi-sovereign and supranational issuance (down 58%).
Lower corporate dim sum issuance may have resulted from several factors, says Fitch. They include: broader emerging market risk aversion, lower investor interest as secondary market yields remain low relative to US dollar (USD) investment-grade issues of Chinese corporates and, higher onshore deposit rates in China. Corporate dim sum bonds typically are smaller in size than USD bonds, have shorter terms, and face regulatory hurdles in repatriating issue capital onshore.
The jump in financial issuance could be a response to tightening onshore financial conditions, brought on by worsening asset quality and liquidity tightening by policy authorities.
The onshore yuan (CNY) bond market is far less open to foreign investors, but has seen steady issuance based on data from the Asian Development Bank (Asian Bonds Online). Issuance is dominated by the government, which includes obligations of the central and local governments, the central bank, and quasi-government institutions. The total amount of outstanding CNY bonds reached the equivalent of US$4 trillion in mid-2013, up from US$ 3.5 trillion in mid-2012.
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