It is the duty of regulators to ensure the dim sum market evolves sufficiently to be able to host a more diverse investor and issuer base, particularly as the market is of key strategic importance in the liberalisation of China’s capital markets, say investors.
China established the dim sum market in order to help with the internationalisation of its currency and as a result regulators need to stay ahead of the game, said Hayden Briscoe, head of Asia Pacific fixed income at AllianceBernstein.
“Getting the dim sum market right, as an underlying trade financing role, is central. This has wider implications and is fundamental to the broader economy so we think it’s really important,” he said, at the Euromoney Conferences Global Offshore RMB Funding Forum in Hong Kong on May 8.
He is mostly happy with the speed at which the Hong Kong Monetary Authority (HKMA) and the People’s Bank of China (PBoC) have been implementing reform. However, there is still more that could be done.
“We’d really like to see further increases in the amount of NDRC [National Development and Reform Commission] quota allocations to allow China’s corporates to tap the dim sum market. [Also] from our understanding, those firms that do raise funds in the dim sum market effectively need to use [the capital] offshore and allowing more of them to use this window to take the capital back onshore will promote more issuance and greater issuer diversification.
Others agree, suggesting that if positive developments are not pushed through, the market could become limited to the same pool of issuers and investors and as a result become stale.
“We do not want to be in a situation where we wake up in six months, 12 months or a few years time and we haven’t seen the market evolve,” said Bryan Collins, portfolio manager for fixed income at Fidelity Worldwide Investment.
“The Hong Kong dollar bond market is an example of [this]. There have been several problems but it’s a chicken and egg situation and it just hasn’t taken off. There are question marks over the longevity of the [HKD] in its own right, but nonetheless I think it’s an important observation to make sure progress and development continues and doesn’t stagnate.”
As well as granting more quotas to Chinese issuers and allowing Chinese names to repatriate capital back regulators could do more to ensure that issuers stick to global best practice and to establish a better credit culture among investors.
“If you think about the retail investor in Asia there is a tendency to play the momentum, as opposed to thinking hard about long term fundamentals. In terms deepening the credit culture, we are still far from where we should be if this space is going to make a meaningful impact globally,” said Chia-Liang Lian, head of investment management for Asia ex-Japan at Western Asset Management.
In addition, there has recently been more interest from global institutional investors in the dim sum market. If regulators want to nurture institutional participation in the market they should address the tendency among issuers to rely on name recognition and issue unrated bonds.
“[By issuing without a credit rating] the issuer may think they’re getting an extra couple of basis points by tricking an investor. A lot of the demand has been retail interest by the private banks but once the market becomes institutionalised these issuers will want to come back and develop a liquid curve and a well diversified investor base,” said Briscoe.
“At the end of the day the RMB bond market should be as large as the US or Euro bond market and credit ratings will be very important to attract capital to the country.”
Another step the regulator could take is to encourage more defaults in the market, which would increase transparency over the default process. China’s offshore bond market has had very few defaults in its history as the local and regional governments tend to step in to save issuers. “In a perverse way we would like to see more defaults so that we have a path of precedence, so that we know how it works,” said Collins.
Lian agreed. “Default is a dirty word for fixed income investors, but at the end of the day the preservation of capital is of paramount importance and this market should be subject to the basic discipline of market forces. One thing that keeps us awake at night is the question of whether the yields are adequately pricing in the credit risk.”
However, while these developments would be a positive, one of the attractive elements of the market from a fund manager’s perspective is its complexity and volatility.
“The gradual development of regulation and the fact that creditworthiness is not necessarily being perfectly priced by retail investors, provides a lot of opportunity for us as an active manager,” said Neil Weller, director of Alpha strategist at BlackRock.
“For those that can do the credit work, make the selections of the right companies, enjoy the yield and ride the volatility while the currency is not fully liberalised, I think it’s a great time to be invested.”