RMB Internationalisation Faces Key Milestone

Moderate year-on-year (YoY) growth is in prospect for offshore renminbi (RMB) bond issuance in 2015 predicts Moody’s Investors Service, although offshore issuance declined YoY in the first quarter of the year on the back of falling onshore interest rates.

“China’s ‘One Belt One Road’ policy and active participation in the establishment of the Asian Infrastructure Investment Bank (AIIB) further bolster the use of RMB in cross-border transactions and investments,” says Ivan Chung, a Moody’s senior vice president and head of Greater China credit research and analysis.

“Furthermore, the International Monetary Fund’s (IMF) upcoming decision whether to include RMB in the basket of Special Drawing Rights (SDRs) could become a key milestone in RMB’s internationalisation and lead to a considerable increase in investors’ asset allocations to RMB-denominated assets, including bonds.”

Chung was speaking on the release of the credit ratings agency’s (CRA) just-released
‘Renminbi Bonds Monitor,’
a quarterly report that provides an update on China’s onshore and offshore RMB bond markets, and Moody’s view on market trends.

While issuance by Chinese corporates slowed in Q115, issuance momentum by foreign financial institutions remained robust. The nascent formosa bond market expanded quickly, replicating the growth pattern of the dim sum bond market in early years. They will remain the growth drivers of the offshore bond market in the second half of the year, says Moody’s.

On the onshore bond market, the CRA’s report highlights the first public bond default in March 2014, and three recent cases in May and June 2015, that signal the regulators’ increased tolerance for such defaults, and let the markets play a more decisive role in restructuring.

The breakup of this “automatic bailout” myth, which had led some investors to ignore credit fundamentals in the expectation that all debt would ultimately be underwritten by the state, has widened the credit spreads between higher rated and lower rated bonds by domestic companies. This highlights how credit risk is playing a more important role in the pricing of onshore bonds, says Moody’s.

The report further looks at the recent announcement by FTSE Russell that it will include Chinese A-shares in two new emerging market indices – a significant development and the first time a major index provider assigns weight to domestic Chinese equities in an investable index geared to overseas investors.

Moody’s says the move also underscores the growing inclusion of RMB-denominated assets into global benchmarks, and is a critical milestone for the movement of passive investment flows into China.

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