Mainland Chinese issuers need to up their involvement in the dim sum market if it is to succeed in the long run. In particular the responsibility lies with China’s Ministry of Finance along with the country’s state-owned enterprises (SOEs) to issue more debt.
In addition, international best practices need to be adopted by the offshore renminbi market, and more institutional investors need to be encouraged to participate in the market.
Bond offerings from mainland issuers have fallen to less than 50% of total issuance in the dim sum market this year, after an initial spurt of deals at the start of 2011. If this trend continues, the market is not likely to develop and deepen in the long run according to Ping Chew, Shanghai-based managing director at Standard & Poor’s (S&P).
“Foreign entities can certainly help to diversify the market, but they are unlikely to form the mainstay of issuance. Instead we believe the Ministry of Finance should take primary responsibility for providing the necessary depth and liquidity that would help the offshore renminbi debt market to thrive. State-owned enterprises also have a major role to play in this, but to a lesser extent,” he said.
China’s US$3.3 trillion domestic bond market is the third largest in the world, behind the US$26.3 trillion bond market in the US and Japan’s US$15 trillion market. It is 66 times larger than the dim sum market, which is worth a relatively paltry US$50 billion.
The growth of China’s bond market has been primarily driven by government-related issuers, and SOEs continue to prefer to tap the domestic market rather than the offshore renminbi market. Ping believes that this is due to the size of the onshore market as well as lower transaction costs and the fact that Chinese names are more likely to be recognised by mainland investors.
He argues that these issuers need to start issuing more in the dim sum market in order to establish a benchmark yield curve.
“In most markets, the curve is drawn from the issuances of sovereign governments, with maturities ranging from the short term to the very long term. Increased Chinese government issuance in the dim sum market would continue to help build the benchmark yield curve,” he said.
The second sector he would like to see more issuance from is non-bank SOEs in China. At the moment, Chinese commercial banks and their Hong Kong subsidiaries are the most prolific issuers in the offshore renminbi market, with a 36% market share.
“The bulk of the outstanding issuance is attributable to Agriculture Bank of China, Bank of China, China Construction Bank, Industrial and Commercial Bank of China – collectively known as the ‘big four’ – and Bank of Communications, the fifth largest bank in China,” he said.
He argues that the dim sum market needs to broaden. Non-bank SOEs from the mainland only represent 7% of the dim sum market though they are among the largest borrowers in the onshore bond market. However, this is due in part to the Chinese regulators’ slow approval process.
Additionally he argues there are other several factors that could lead to an increasingly large and liquid dim sum market.
“We see several probable drivers for the long-term growth of the dim sum market: Chinese government policy, Chinese macro-environmental factors, greater diversification among issuers, and the participation of more investors,” he said.
He argues that regulations affecting the value, convertibility and flow of funds for the renminbi are of key importance as they affect the currency risk of borrowing in renminbi as well as the ability to swap and hedge the currency and even the volume of offshore renminbi deposit funds that can buy dim sum debt.
Another key factor that will impact the development of China’s offshore bond market is whether or not covenants are brought in line with international best standards.
“In the early stages of the dim sum market’s development, investors were willing to accept covenants that were below global standards. This acceptance is on the wane. Tapping the broader field of global institutional investors would enable the market to accelerate its growth,” he said.
He advises the introduction of standard covenants that continue for the life of the bond, as well as increased legal certainty, transparency and accountability.
“Long-term institutional investors, the pillars of a healthy and robust market, are looking for these best practices. While retail and private bank monies play their part in an active market, they tend to only supplement institutional investors.”
