Middle Eastern central banks have begun to diversify away from the US dollar to gain exposure to the Chinese currency through investment in dim sum bonds, a trend which is helping ‘AAA’ rated deals to get done in the offshore renminbi market.
Some central banks in the Middle East also have quotas to invest into onshore Chinese debt, but particularly in the case of high-grade credit, the liquidity and duration offered in the offshore market renders it more attractive.
“It’s likely to become a reserve currency at some point in the future so they’re starting to take on small amounts,” said James Fielder, head of local currency syndicate for Asia at HSBC.
The trend will continue as Middle Eastern investors diversify away from US dollars, in order to reduce reliance on dollar reserves while matching the increase in trade with China, according to Jeffrey Yap, head of Asian fixed income trading at Mizuho Securities.
As well as central banks, Middle Eastern sovereign wealth funds and asset managers have started investing into dim sum bonds, particularly in the higher grade spectrum, he said. The development comes as ties between capital markets in China and the Middle East have intensified this year.
On January 18, the UAE signed a Rmb35 billion (US$5.6 billion) currency swap line with the PBoC, after a visit to the Gulf by Chinese premier Wen Jiabao. So far renminbi settlements have been limited to commodity importers and large retailers.
The Dubai International Financial Centre (DIFC) is pushing to become the biggest offshore centre for RMB settlement in the Middle East, with plans to develop itself as a trading hub for the Chinese currency, according to local paper The National. However, the central bank has the ultimate authority to make this call.
Meanwhile on March 21, Emirates NBD, the biggest bank in the UAE by assets, printed the Gulf’s first dim sum bond. The Rmb750 million three-year deal offered a coupon of 4.875%. It then tapped the markets a week later for a further Rmb250 million.
Abu Dhabi Commercial Bank tapped the marked this month with a Rmb100 million five-year bond issued at a yield of 4.125% and on October 16, National Bank of Abu Dhabi (NBAD) placed a RMB200 million one-year dim sum bond, at 3.1%.
Middle East investors are counted with those from Europe and Africa so precise figures on they take up of these deals are not available.
Market support
Bankers agreed that Middle Eastern investment into dim sum debt is predominantly limited to very high grade credits, ‘AAA’ names and government bonds.
“Liquidity is usually a pretty important consideration too, so most of their purchases have been targeted around the bigger sovereigns, MoF or China Development Bank types of deals,” said Anthony Arnaudy, head of debt capital markets for Northeast Asia at Standard Chartered.
“They don’t buy corporates and they don’t usually buy FIs [financial institutions] either. Maybe if it’s issued by a FI from their country but even then that’s not that common.”
The increasing demand for renminbi debt among central banks is a key element in supporting the execution of high quality deals in the dim sum market.
“It helps ‘AAA’ names get deals done. Without the central banks it would be more challenging because obviously they don’t pay very much, so your PBs won’t buy. Whether it will encourage more ‘AAA’ issuers to come is dependent on other factors such as the cross-currency swap levels,” said Fielder.
This therefore poses the question as to whether demand for ‘AAA’ rated renminbi debt is likely to outstrip supply.
We’ve seen a slowdown in supply, though I think the interesting dynamic is that the market is set up for some fairly robust investor demand. The currency has performed pretty well over the last two to three months, a sign that the Chinese economy is adjusting to a slower growth rate and the world isn’t coming to an end,” said Arnaudy.
“In terms of relative yield RMB is now offering a pretty good decent pick up relative to USD investments so I think some of the groundwork is being laid.”
Onshore vs. offshore
Another factor that will shape the dynamics of Middle Eastern investment into the dim sum market is the fact that select central banks in the region are now eligible to invest onshore.
“They can also get access to the onshore market [though] some of them have got restrictions on the amount they can invest in China, or maybe they view the dim sum market as having more favourable characteristics in terms of liquidity or maturity profiles,” said Arnaudy.
While liquidity may be better offshore, China’s government bonds offer higher yields in the onshore market.
“At the moment the China government offshore bond is yielding roughly 2.66% for 2014, but onshore they’ll be yielding much higher. So if the Central Banks can have access to onshore which some of them do, then there’s no reason to buy in the dim sum market, they’d only buy when their quota’s full,” said Fielder.