China’s National Development and Reform Commission (NDRC) is said to be waiting for the offshore renminbi market to stabilise before issuing its long-awaited approvals for state-backed companies to sell dim sum bonds. And following the disappointing reception to the Ministry of Finance’s (MoF) dim sum bonds in June, analysts believe the regulator is also looking to China’s policy banks to create new benchmarks for pricing.
“The markets are still very quiet and everyone is still wondering when the NDRC and PBoC (People’s Bank of China) will allow some state-owned financial institutions and non-financial corporates to issue,” said an offshore renminbi-focused origination banker. “There can be a pipeline of deals here but that issuance depends on regulators’ policy and timing. These approvals have been very delayed this year, but everyone hopes this will be soon.”
The NDRC was strongly believed to be preparing its new approvals for after the MoF’s six-tranche Rmb13 billion (US$2.13 billion) bond on June 26.
However, the MoF’s deal largely disappointed market participants, coming at an inopportune time one month after US Federal Reserve chairman Ben Bernanke’s comments on tapering the quantitative easing programme caused volatility in global markets. The MoF additionally issued its bond as the People’s Bank of China orchestrated a liquidity crunch onshore.
In the end, the MoF’s yields were up and demand was down. It attracted just Rmb22.69 billion of orders across its six tranches, or 1.75 times the deal’s size. This compares to the MoF’s Rmb23 billion issue in 2012, which attracted Rmb58.68 billion in orders, covering the deal by 2.5 times.
As a result, instead of issuing new approvals after the MoF bond, the NDRC took a more cautious approach.
“The MoF had a tough issue in June and sent borrowing cost higher. Secondary market has improved subsequently but we still need high quality issuer to re-open the primary market,” said Becky Liu, a senior rates strategist at Standard Chartered. “For the rest of the year we’re probably going to see Chinese banks and investment grade companies issue bonds under the NDRC programme, but the market is still a bit soft…People are looking for better clarity on the issues.”
Analysts still believe the NDRC’s approvals are imminent as few mainland banks or state-backed enterprises have issued bonds in 2013. Some analysts forecast that the approvals will come next month after investors return from the summer break, and others expect news by the end of August.
But more than a month after the MoF issued its bond there is still little concrete information on a timeline.
“The market is seeing some activity and there have been a couple of dim sum bonds this summer, so it’s a start. Things are starting to warm up a little bit,” said Steve Wang, head of fixed income research at Bank of China International. “If I were [the onshore regulators], I would start discussing some of the timing targets to open approvals up. This could help issuers start rolling out the process and plan to submit their applications. People will need to get ready for when the market improves even more.”
Turning to the policy banks
When the NDRC finds that offshore renminbi bonds’ secondary levels move even closer to those seen in May, it may encourage some of China’s strongest state-backed financial names – such as policy banks - to issue, hopefully creating a new pricing reference after disappointment of the MoF bond.
The MoF’s Rmb1 billion 15-year bond sold in June 2012 has seen its secondary price drop from 101 in early May to 99 by June 15, where it continues to trade.
The argument is that China’s two policy banks - China Development Bank (CDB) and Export-Import Bank of China (Chexim) – would be good proxies for the government.
Both CDB and Chexim have historically been active dim sum issuers, and have even led the MoF to push out bond yields and sizes to develop the market. Yet neither has sold CNH bonds in 2013, leading analysts to say that they are due.
And their window of opportunity may be approaching. The market has already begun to improve, and in July alone dim sum bonds have already recovered 35% of the losses sustained in June, according to HSBC. That trajectory is expected to improve into September.
Further, the renminbi reached a new high against the US dollar on August 7 – closing at Rmb6.1171 – which may give investors a renewed interest in the currency and renminbi-denominated products.
“We’re still a ways from getting back to the levels back in early May when the market was at its peak but we’ve seen a nice recovery and the market may soon see some success cases with new bonds,” said Wang. “We may not see levels recover exactly to the highs earlier this year, but the market is improving and after the summer break it would be a good time to encourage more issuance. Nobody can complain.”