Issuers looking to participate in the Hong Kong offshore renminbi (CNH) bond market could turn to certificate of deposits (CDs) as a pricing reference as volumes of the short-dated instrument surges in 2013.
An estimated Rmb141 billion (US$22.6 billion) of offshore renminbi debt is expected to mature in the first quarter, accounting for 37% of total outstanding CNH bonds and CDs. About 80% of that redemption is CDs in the first half of the year to August, majority of which are from Chinese banks.
Given the sizable volume of CDs issuance this year, this could act as an alternative benchmark rate for dim sums bonds rather than offshore China government bonds (CGBs).
"When corporates are looking to issue bonds, they would need to start comparing their own issuance rate versus the established benchmark which is set by the CD rate," said Becky Liu, senior rates strategist at Standard Chartered (StanChart) to Asiamoney PLUS in a telephone interview on December 18. "Now the CD curve has extended to 10 years and the issuance is extremely frequent especially at the front-end for one- to three-year paper."
Crystal Zhao, fixed income research associate at HSBC agrees: "The CD offering rate will have the impact on the yield of rest of the dim sum bond space. For instance, from the investor's point of view, if one year bank CD rate is 3.2%, and three-year corporate bond offers a yield of 3.5%, you need to consider if the 30 basis point (bp) yield pick-up is enough to offset the three-year duration extension."
Investment grade borrowers usually access the CD market for short-term funding. 'A'-rated Chinese financial institutions are the most regular players in this market.
"Given the intensive issuance of CDs this year, it is going to set the single 'A' curve from one year to three years and this could be extended for longer dated CDs as they become more frequent," added Liu.
The one-year CD rate was hovering around the 3%-3.2% level and for banks with slightly weaker credit ratings of around 'BBB' rates can be up to 3.3%, as of December 18, 2012. By comparison the three-year offshore renminbi CGB was yielding 2.56%.
Apart from being the most efficient and easiest method to raise short-term finance, the CD market is also beneficial for its ample liquidity, especially when compared to the thinly-traded interbank market, highlight market participants.
However, the net issuance of CDs actually declined this year because banks failed to replenish the same amount of maturing CDs in August and September when the liquidity situation in the offshore CNH market worsened, indicating that it might be slightly misleading to use the instrument's rate as a reference.
The net issuance of offshore renminbi CDs from January to November 2012 is Rmb47 billion, while the net issuance for the full year 2011 was Rmb75 billion. This drop was reflected in the one-year CD rate, which rose from 2.88% in January to 3.17% in October, say market participants.
“Generally speaking, the liquidity of the CD is not as good as a bond," said Zhao. "Also, the types of investors in both instruments are not really replaceable or interchangeable. Therefore, the CD rate is unlikely to be used as the key benchmark."
Zhao highlights that investors of CDs only consists of hedge funds and asset management firms, as oppose to bonds that has a more diversified investor base.
Despite frequent fluctuations in offshore renminbi liquidity, experts believe that CD rates will remain at similar levels.
"I see limited room for the CD rates to go down although I don't see a spike in the beginning of 2013," said Liu. "For the corporates, if they want to lower their borrowing costs, the CD rate has to come down otherwise that sets the floor for what most of the investment grade corporate can achieve in the dim sum bond market."
As of December 13, 2012, CDs have accounted for 58% of gross CNH debt issuance or 14pp more than 2011, while deposits in Hong Kong have declined 6% in the first 10 months, notes HSBC.
HSBC predicts CNH bond plus CD issuance to be between Rmb280 billion and Rmb360 billion, while Standard Chartered forecasts total issuance to exceed Rmb300 billion in 2013, a marginal increase when compared to 2012's issuance of Rmb263 billion during the first 11 months.