There’s little appetite for dim sum bonds
After months of inactivity, offshore renminbi-denominated bonds finally came to life this week with two Chinese issuers announcing their respective transactions. The deals are widely expected to fare well and have excited some market participants, but it would be premature to call a comeback of the dim sum market.
On Tuesday, Bank of China opened books for its maiden international green bond, split between dollars, euros and offshore renminbi (CNH). Chongqing Grain Group meanwhile is also meeting dim sum bond investors this week.
The long overdue activity has raised the hopes of some market watchers, who reckon the transactions will finally breathe life into an asset class that has all but disappeared recently. According to data compiled by GlobalRMB, a sister publication of GlobalCapital Asia, there have been only six offshore RMB deals worth Rmb6.8bn ($1.02bn) year-to-date.
This is a whopping 90% drop compared to the same period in 2015. And the reality is slightly darker given only two of this year’s deals, by Hungary and Fantasia Holdings Group in April, are dim sum offerings and the rest are Formosa bonds.
So it’s no surprise that some bankers are desperate to interpret this week’s new issue announcements as a sign of dim sum pick-up or even revival. But it would be best for the market as a whole to temper their expectations about the CNH market.
One big reason is because it’s all about currency when it comes to dim sum bonds, with the RMB hitting a new record low this week in more than five years.
On Monday, the RMB touched the lowest level since December 2010, with the CNY/USD closing at 6.6636. This means that the currency has lost 2.7% of its value so far this year. The CNH, meanwhile, hit 6.6820 per dollar at one point on Monday, its lowest level since January 8.
The weakening currency is a problem for investors as it puts pressure on the returns they can pocket. As a rough estimate, the actual gain is typically the headline yield minus the degree of currency depreciation.
This means that if a bond was sold with a yield of 5% earlier this year, investors are just getting around 2.5% now after taking into account the depreciation.
Room for dim sum?
Admittedly, it’s not just the RMB that is feeling the heat at the moment. After the UK’s decision to leave the EU late last month, other local currencies in Asia also fell against the greenback, meaning returns for holders of notes in those currencies took a hit as well.
But the problem is, while other Asian local currencies recovered relatively quickly following Brexit, the RMB has remained weak and is expected to depreciate further.
For example, UBS expects CNY/USD to fall to as low as 6.8 by the end of this year, and on the back of ensuing FX volatility stemming from Brexit, the bank revised the year-end forecast for 2017 to 7.0-7.2 from 7.0.
Against this background, dim sum bond investors have to ask for higher yields to compensate for FX-induced loss. It’s a big question, however, whether issuers would accept the request at the expense of higher costs of funding when compared to the onshore market.
The gap has narrowed recently, but onshore investment grade and high yield bonds are already 70bp-100bp and 100bp-200bp cheaper, respectively, than offshore.
Also, it’s worth noting that Bank of China’s green bond and Chongqing Grain’s debut this week are more politically driven, reckon market watchers. As a government-affiliated big Chinese bank keen to internationalise the RMB, it makes sense for BOC to include CNH as part of its landmark green bond, an approach also taken by its peer ABC last October.
For Chongqing Grain, it will mark the first CNH bond since the PBoC and the Monetary Authority of Singapore launched a programme in March to allow corporates in Chongqing to issue RMB bonds in Singapore and repatriate the funds in full.
Both these issuers have reasons beyond actual use for offshore RMB to push their transactions forward. While they may whet investors’ appetite, there’s no reason for them to leave room for extra helpings.