The dim sum market had a strong start to 2014, with monthly gross issuance hitting a record of Rmb27bn ($4.45bn) in January. There is heavy redemption pressure this year, and strong primary supply is expected by most market participants. But with little expectation of any policy breakthroughs — or any radical change to the Chinese government approach to tapping the market — for the market this year, right now diversification will play a more important role than volume when it comes to taking the market to a new level.
Some assessments point to the outstanding dim sum bond market exceeding Rmb750bn by the end of 2014, up from Rmb572bn in 2013. Some think primary issuance will hit about Rmb570bn this year. But the need to improve the structure of the market is still uppermost in many bankers' minds.
This doesn’t mean volume is unimportant. On the contrary, size is a perfectly justifiable measure of how developed a market is. But given the fact that the biggest dim sum deal from a non-sovereign entity is Rmb5bn ($824.5m) and so far there appears to be no regulatory leap in the pipeline in terms of market expansion or the repatriation of proceeds, diversification even with small issuance sizes would make a difference.
Market participants often complain about the illiquidity of the dim sum market, with hold-to-maturity the dominant investment strategy. Some portfolio managers blame the bigger investors for keeping liquidity tight, complaining that there is barely anything to trade.
Greater diversification in the issuer base could help reduce this problem. The more investment options that exist, the more encouragement there will be for trading as investors are more able to shift allocations into other areas. Systemic risks resulting from concentration in just a few industries would also be reduced.
An expansion in the variety of issuers would also attract more investors to the market in the first place, as different issuance sectors would bring their own buyside with them.
Some stellar debuts last month have highlighted the potential. Trade and Development Bank of Mongolia became the first Mongolian issuer to tap the dim sum market. The Rmb700m 10.25% three year deal received over Rmb1.4bn orders from 48 accounts. Some two thirds of the deal went to real money accounts.
There was also the debut dim sum of China Orient Asset Management Corp, one of the four Chinese AMCs that were set up in the 1990s to tackle non-performing loans in the country’s state-owned banks. That deal saw some diversification of the investor base, with 11% going to non-Asian investors compared to the 99% Asian allocation for an offering a year ago from its peer China Cinda Asset Management.
There has also been a breath of fresh air provided by issues from three Chinese technology companies, Peking University Founder Group, China General Technology (Group) Holding and China Electronics Corp.
The short duration of most dim sum transactions is another thing that those in the market are keen to improve. Doing so provides diversification for investors, and in turn also opens the market up to new buyers who are looking for longer dated assets.
Export-Import Bank of Korea, a frequent visitor to international debt markets, launched a ten year tranche on January 16 that not only helped extend the overall offshore RMB curve, but also caught the eyes of insurance investors from Singapore and Taiwan.
Three years is still the preferred tenor because of expectations around renminbi appreciation, but deals like Kexim's are exactly the sort of development that is needed: bankers and issuers should be actively looking to find the right asset-investor match, bringing different dynamics to the market.
After all, anything that promotes the internationalisation of the renminbi will also help to extend dim sum duration. The more that overseas investors can be enticed to hold renminbi assets, the bigger possibility there is that they will be prepared to hold them for longer.
It’s clear that the Chinese government is not about to change its approach to setting benchmarks in the offshore renminbi market. Government issuance will remain lumpy. That puts the responsibility for changing the nature of the market onto other issuers. Diversification is what is needed.