The development of the offshore renminbi bond market will continue only if issuers genuinely see the need to use their renminbi proceeds instead of swapping them for overseas use.
Financial institutions have been issuing more than corporates when it comes to the dim sum space this year. This indicates that the real usage of renminbi has declined as corporates – either China-based or foreign companies with expansion plans into China – avoid the market, and foreign banks increasingly tap the market for short-term financing whilst swapping the proceeds back into their home currency.
The number of corporate deals has declined by more than half from 59 in 2011 to 25 with proceeds falling from US$11.4 billion to merely US$4 billion year-to-date, according to data from Dealogic. The number of bank bonds on the other hand has increased from 17 last year to 21 year-to-date, with volumes surging 44% from US$1.4 billion to US$2 billion.
This is a result of marked rise in yields compared to last year. In early 2011, corporates were able to issue three-year debt at a yield of 2%. Now, they would have to issue a one-year bond at 3%.
As a result of this, the dim sum market is not anticipated to witness a deepening – in terms of size and tenor of deals – in the next few months.
“It would be good to see more real money accounts going into the market,” said Clifford Lee, head of fixed income at DBS to Asiamoney PLUS in a telephone interview on August 30. “It shouldn’t be a purely arbitrage or swap market-drive trade because it can be closed for a long time when the swap points are not favourable.”
Of late, activity in the CNH bond market gained momentum given the USD/CNH basis swap has moved in the favour of foreign issuers. The basis swaps has jumped from a six-month low of 120 basis points (bp) in March to 240bp towards end August.
“The cross currency swap has gone up which makes it cheaper when you swap it back into US dollars,” said James Fielder, head of local currency syndicate for Asia at HSBC to Asiamoney PLUS. “We had a very large increase in issuers looking to issue, so we wouldn’t be surprised to see other issuers coming.”
The last two bond issues were from European financial institutions - Société Générale and ABN Amro last week.
Société Générale issued a Rmb500 million (US$78.8 million) two-year bond with a yield of 4.15% on August 30. Books closed in excess of Rmb700 million with 50 accounts participating placed entirely with Asian investors..
ABN Amro also issued a Rmb500 million two-year bond, but at a lower yield of 3.5% on August 29. The order book for the senior unsecured issue, which was deemed as a "toe in the water" bond issue, also placed entirely with Asian investors, with Rmb800 million orders from 60 investors.
Market participants predict this trend to continue for banks and interest from corporates to remain relatively subdued towards the end of the year, signalling that the maturity pace of the offshore renminbi bond market will remain sluggish.
“It will take a little bit more time for markets to stabilise and liquidity to pick up before we can see more conviction in tapping the markets for the corporates,” said Lee. “Because of global interest in CNH, the bond market here will take a shorter time to mature than other Asian currency bond markets, but I don’t think it will happen within a six-month to one-year period.”
Lee forecasts that it will take around two to three years for the market to move away from its current speculative-driven state.
Another debt capital market (DCM) dealer expects the size of future issuance to remain relatively small – around the Rmb500 million to Rmb1 billion size – and maturities short – of around two to three years.
“The current CCS (cross-currency swap) environment is favorable for issuers so I won’t be surprised if more people are looking to get things done in the dim sum market,” declared Malcolm Mui, executive director for fixed income syndicate at Nomura to Asiamoney PLUS. “Deal sizes are relatively smaller for European issuers since investors might have limited lines to European names. Moreover, European issuers without operations in China or Asia might not have large renminbi funding needs and proceeds might need to be swapped back.”
Additionally, the CNH bond market could gain interest again once the People’s Bank of China (PBoC) maintains its monetary easing stance as the rates will likely filter itself into the offshore renminbi market, notes experts.
“The bond market is like the bull market. When rates are going down, it creates a stronger positive momentum as far as bond investments are concerned,” said Choon-Hong Tee, regional head of capital markets for North Asia at Standard Chartered to Asiamoney PLUS. “It also means it will be cheaper to fund and easier to get it done in a positive environment.”
“The swap markets are getting more mature and would make it easier to do swap driven transactions from time to time,” he added.
Tee predicts a dim sum bond volume of more Rmb200 billion for 2012. Currently, total bond volumes are around Rmb150 billion.