It was all looking so good. In 2013, 93 syndicated dim sum bond deals priced for total issuance of Rmb114bn ($18bn), according to GlobalRMB data. Last year closed with a record 140 deals priced, raising Rmb226bn.
Forecasts for 2015 vary, but pretty much all analysts agree on one thing: it won’t look nearly so good.
HSBC's number-crunchers recently said they were expecting gross issuance of offshore RMB bonds and certificates of deposits (CDs) to be just below the 2014 total. Standard Chartered laid out an even grimmer scenario, expecting gross issuance of bonds and CDs to fall by 10% and net issuance to fall by nearly a quarter in their worst case.
Given January’s dim sum record, with public issues totalling just Rmb6.1bn (with half of that coming from one deal by Cades, a French agency), the downbeat estimates are looking quite generous.
Rate inversion
Interest rates are the primary reason for the decline in issuance. Rates that had already almost hit the floor in Europe are now threatening to fall through it entirely on the back of the new quantitative easing programme by the European Central Bank.
China’s State Grid was quick to catch on, issuing its first ever euro-denominated bond on January 19. The €1bn ($1.2bn) deal was a harbinger of what could be a flood of Chinese and other Asian issuers going for bargain-cheap low rates and tight spreads in the euro market.
At the same time, China's onshore and offshore rates have been converging as a result of expectations of looser policies by the People’s Bank of China (PBoC). Spreads in interbank rates, as well as onshore/offshore sovereign yields in many tenors have been on a collision course through most of last year. For three year paper, for example, the spread went from 200bp to around 40bp.
The spread between three month Hong Kong interbank offered rate (Hibor) and the equivalent in Shanghai (Shibor) went from 163bp to 44bp in the last five months. Should the trend continue, the appeal for domestic issuers to tap the dim sum market could disappear entirely.
FX not helping
Finally, as has been repeated ad nauseam over the past year, the one-way bet of RMB appreciation is a thing of the past. The currency’s increased volatility is here to stay, with analysts agreeing that further depreciation in the short term is all but certain. As of January 27, the RMB was down to 6.2426 against the dollar, down 3% on a year ago.
Issuing in RMB and then swapping into dollars as a means of getting cheaper funding than issuing directly in dollars has also become less attractive. Increased volatility in the RMB and a strengthening dollar have meant that cross-currency swap rates have shot up, making it expensive to hedge RMB long positions.
Issuers will — and should — always seek out the best deal available, and nothing will change that. But the offshore RMB bond market has, since its inception in 2007, served well the Chinese policy agenda of pushing RMB assets into the portfolios of more and more investors around the globe, as well giving the many corporates trading with China a place to invest their growing RMB cash hoards.
The premature death of the dim sum bond market could wreak serious damage to the progress made so far.
Ideas anyone?
Perhaps predictably, bankers have a more optimistic view than the analysts. They tell GlobalRMB that the slow start is a result of temporary heightened volatility, and hint that pipelines are healthy enough for a comeback not to be ruled out.
From the perspective of the Chinese authorities, though, it is simply too early to let the success of a nascent market such as this rest entirely on the market’s whim. Chinese authorities have no tools to control rates elsewhere, of course, but they can perhaps think up new avenues to incentivise issuers — in particular international ones — to embrace what Swift now says is the fifth most used currency globally.
Panda bonds — onshore RMB bonds issued by foreign entities — have mostly remained a pipe dream. This is certainly one area where liberalisations could help, whether by simplifying approval procedures or by easing capital repatriation procedures for potential issuers. It's just an idea, but the mooted massive expansion of free trade zones beyond Shanghai to include Fujian, Guangdong and Tianjin, slated for March 2015, could be used as the perfect catalyst for such a reform.
More broadly, innovation is desperately needed. The IFC surprised with the first RMB green bond in June last year, an Rmb1bn deal with proceeds to be used for renewable and energy efficiency projects. No one has followed in its path, despite the broader success of environmentally responsible financing.
Sovereigns offshore could also step up their game and use RMB bonds as a tool to further their declared agenda to strengthen linkages with Beijing. The UK was quick to follow up on its appointment as an RMB hub with the first non-Chinese central government bond last October. Two provincial governments have also tapped the market — New South Wales in Australia and British Columbia in Canada — but investors seem primed for more governments to join in. Among other things, this would increase confidence for other non-Chinese issuers to consider testing the waters of RMB fundraising.
The January 28 deal from Cades could point to good intentions from Paris in this direction. But if widely reported estimates are to be believed, there are some 30 central banks holding RMB assets around the globe either as cash or through purchases of RMB bonds in the onshore interbank bond market. Those looking for the continued growth of an offshore RMB bond market might very well hope these central banks push national treasuries to step into the market themselves.