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Window for China dim sum issuers reopens

08 Nov 2012

A combination of rising rates in China and favourable investor sentiment offshore has made the dim sum market a bargain for mainland issuers – though only for a short time.

Rising rates onshore as well as positive economic factors overseas have created a favourable funding window for Chinese names to issue offshore renminbi, or dim sum, bonds, coming as a reversal to a months’ long trend where the spread between the onshore and offshore rates narrowed

China’s onshore rates have risen more than 50 basis points (bp) since mid-June, largely attributed to Beijing’s decision to postpone a cut to banks’ reserve requirement ratio (RRR), to provide longer-term liquidity, causing investors to sell bonds to free up capital.

Meanwhile, offshore investor sentiment toward China has improved after fears of a hard landing eased. This has both attracted investors to mainland issuers as well as renminbi products, says the head of one bank’s debt capital markets (DCM).

“People are saying that China has bottomed out and now that we’re nearing the leadership challenge and coming closer to understanding the Draconian change in policy, people are more optimistic that China has found its footing,” said the DCM banker. “Some of the rhetoric around the currency manipulation rates has eased and investors see a yield pickup that makes Chinese credits attractive.”

This is coupled with renewed sentiment that the offshore renminbi, or CNH, will continue appreciating against the dollar. Between July 25 and October 29, the renminbi appreciated 2.5% against the dollar, due to the release of positive economic data out of China as well as Beijing’s decision to ease pressure on the currency ahead of the US election.

Further, a scarcity of dim sum issues in the second half of the year means that new deals will pique investor interest. Dim sum issuance year to date dropped from Rmb12.3 billion (US$1.97) in 2011 to Rmb11.7 billion in 2012, according to data provider Dealogic. Issuance in October also dropped to Rmb640 million across six deals from more Rmb1 billion across 12 deals in September. This could translate to lower yields due to investors’ high demand for any available dim sum credit.

The combination of factors has had a tangible affect on recent issuers, which dealers say have contributed to an additional 20bp-30bp discount offshore.

“For good, high-grade Chinese issuers, there’s a window of opportunity to capture 20bp-30bp offshore,” said one DCM banker at a Chinese brokerage that arranges dim sum bonds. “From a global macro perspective there’s been good liquidity and there’s a belief in renminbi appreciation … and shorter-dated issuers can see a good and narrowing spread [between the onshore and offshore markets].”

Standing as an example is China Guangdong Nuclear Power’s three-year credit, which was the last Chinese name to issue a dim sum bond. On October 25, the company sold a Rmb1.5 billion bond priced at 3.75%. The deal, four times oversubscribed, came in at the tight end of its pricing guidance of 3.75%-3.85%, Asiamoney PLUS’ sister publication Euroweek Asia reported.

The bond priced approximately 70bp lower than what Guangdong Nuclear’s equivalent three-year onshore bond would sell onshore, in the range 4.45%-4.60%.

“The environment is especially attractive for three-year debt, though the advantages aren’t as apparent when you go up the curve,” said the head of DCM, noting that a scarcity in longer-dated debt in the dim sum market makes their pricing similar to onshore rates. “The offshore renminbi bond can help [Guangdong Nuclear] save around 70bp per year while conditions continue to tighten onshore, and when rates are backed up for ‘AAA’-rated names.”

The conditions are a reversal of a trend earlier in the year, which saw rates between the onshore and offshore markets narrow. This occurred after China cut its reserve requirement ratio by 50bp in February and May to its current 20%, improving liquidity onshore, increasing competition for bonds and causing yields to fall. Additionally, investor perception that the renminbi was fairly valued against the dollar dampened appetite for renminbi-denominated products.

However, dealers predict that the window for Chinese issuers will be short-lived – just until the end of the month. “A favourable window exists from now to the end of November, because generally speaking investors close their book by early December, and then you’ll see the market become more active by January,” explained the Chinese brokerage source.

Further, foreign exchange (FX) analysts predict that the renminbi will not continue appreciating at its rapid pace, leading investors to be more cautious with their CNH capital.

“In large part Beijing allowed the renminbi to appreciate at its pace the past few months because of the US elections; it was a way of diminishing the US’ criticism about China’s FX. One of the strongest criticisms has come from [Mitt] Romney with view to label China a currency manipulator,” said Mitul Kotecha, head of global FX strategy at Crédit Agricole. “We won’t see the same pace of appreciation over the remainder of this year. It’s unsustainable given the impact on the economy, and China also doesn’t want the renminbi to be a one-way bet.”

Yet, despite the window, investors should not expect to see many Chinese issuers approaching the dim sum market. Regulatory approval to issue offshore is still cumbersome, as is the process of remitting capital back onshore. Instead, it will be likelier that corporates issue in the new year.

“There will be more scope to get issuance approval next year – it’s not like it’ll be a rush by companies to sell bonds now just because an opportunity exists,” concluded the China securities source. “And they’ll also be waiting for some direction from the economy and a new administration.”

08 Nov 2012