The dim sum bond market will remain dominated by local players while it suffers from illiquidity, a lack of clear benchmarks and an underdeveloped swap market.
But a global multi-tenor deal from a sovereign or quasi-sovereign entity would solve many of these issues, giving the market an unprecedented boost and enabling it to make the transition from local to global, according to a panel at the Global Offshore RMB Funding Forum, hosted by Euromoney Conferences on May 8.
“As an underwriter [in the dim sum bond market] we face three main issues. One is that in the primary market, the pricing benchmark is not that good. This causes problems for investors too,” said Philip Tsao, head of global finance and risk solutions for greater China at Barclays.
The second problem is liquidity in the secondary market. Tsao argues there is no transparent benchmark so investors don’t know if they’re buying too expensively or selling too cheaply.
The third problem is the risk management issue. The cross currency swap market is not well developed as there is no floating rate benchmark, though the Hong Kong Market Association. These three problems limit the market from developing as quickly as it otherwise could.
“The solution, after we met hundreds of investors, is that huge multi-tenor deal from a government or quasi-government issuer, which can be traded 24 hours daily, with Reg-S and 144a documentation would address the three main issues we have seen so far,” said Tsao.
One of the problems with this is that many of the participants putting in bids are commercial banks representing retail investors, who tend to be buy and hold.
Another problem is that for many Chinese names, issuing a bond with 144a documentation means more covenants and constraints and so they would prefer to tap Asian accounts rather than marketing the bond globally, according to Tony Wang, head of China DCM at Bank of China.
Others believe the key to transforming dim sum bonds into a global market is to bring in a series of large-sized deals from a variety of international names.
“Using the analogy of cuisine, my suspicion is that we’ve come a long way in the last five years, and during the next five years we need to reinvent and upscale the dim sum market away from mainland Chinese cuisine to one which is more fusion-based,” said Chia-Liang Lian, head of investment management for Asia ex-Japan at Western Asset Management.
Others agree. For the dim sum primary market to develop it has to become more international, with more 144a issuance, according to Kathy Liu, executive director of fixed income at CITIC Securities International.
“Most Chinese issuers care about having international investors. A lot of Chinese names are already very experienced US dollar issuers so they know how important international investors are to them,” she said.
“In addition to the issues already mentioned we would like to see the development of the investor base. In Asia a lot of investors are very momentum driven and that needs to mature. We would like to see more insurance money, pension funds, endowments and long-term fund managers.”
Another development on her wish list would be more Chinese industrial names, but this is unlikely due to the pricing differential offshore versus onshore. Chinese dim sum issuance has so far been dominated by state-An ‘AA’ rated issuer in China can issue a three-year RMB bond at around 6% to 6.5%, she said.
But in the offshore market, investors require around 9% for a three-year deal from a China industrial name. Chinese dim sum issuance has so far been dominated by state-owned enterprises and property companies.
Dim sum markets
A further step in the globalisation of offshore renminbi bonds is the development of alternative dim sum funding pools to rival the CNH market in Hong Kong.
The growth of offshore renminbi bond markets not just in Hong Kong, but in Singapore, Taiwan and even London will enhance the fungibility of offshore dim sum bonds, which will go a long way in terms of increasing the appetite of global investors, according to Lian.
However, there is a long way to go before other countries can begin to rival Hong Kong as an offshore RMB bond hub, said Leon Huang, head of fixed income at Sinopac Securities, using Taiwan as an example.
“Currently the CNT [offshore Taiwanese bond] market is a local domestic market in Taiwan only, because there are some barriers restricting the number of issuers. You need approval from the FSC [financial supervisory commission] and the Taiwan central bank,” he said.
“Secondly all CNT issuers must be at least ‘BBB’ rated, with no unrated or high yield deals. Companies registered in China and offshore subsidiaries of Taiwan listed companies are also not allowed to issue.”
Taiwan also imposes restrictions on the buyside. For example, foreign institutional investors need to apply to become eligible to invest, as well as paying 15% interest income tax. Furthermore, all secondary market trades are settled through the Taiwan Depository and Clearing Corporation (TDDC) which is very inconvenient for foreign investors, he said.
In order for this market to develop, further deregulation is absolutely necessary. As such, until the offshore dim sum markets are deregulated and unified it is likely that Hong Kong will remain the primary hub for the foreseeable future.