| HONG KONG
HONG KONG Jan 24 The nascent market for "dim
sum" bonds - denominated in Chinese yuan but issued outside the
mainland - is poised for strong growth this year, gaining
traction even as China opens its own markets to lure investors'
money directly inside its borders.
A suggestion by China's top securities regulator last week
that the world's second-largest economy could sharply expand
investment quotas for foreigners fuelled worries that the
offshore yuan bond market may get overlooked if investors
stampede straight into China.
With mainland bonds traditionally offering beefier yields
than their dim sum equivalents, that possibility weighs heavily
on the market.
But fund managers and analysts say the diverse products and
regulatory transparency of offshore markets will continue
drawing issuers and investors to dim sum bonds - especially
given the risks that persist in mainland markets.
"The advantages of the dim sum bond market lie in its
flexibility, transparency and different types of credits
investors can choose from," said Becky Liu, an analyst with
Standard Chartered Bank.
The biggest deterrent to foreign investment on the mainland,
she added, was restrictions on offshore remittances and
requirements for government approvals.
Dim sum issuance started strong this year, with nearly 10
billion yuan ($1.6 billion) of orders chasing three dim sum
bonds in the first two weeks of January, eventually raising a
combined 2.9 billion yuan.
Issuance volume for the year is expected to rise about 20 to
30 percent from 2012, to 320 billion to 350 billion yuan
including certificates of deposits (CDs), Standard Chartered
said in a report on Monday.
The overall dim sum bond market, at 244 billion yuan in
outstanding volume without CDs or 375 billion yuan with CDs,
according to HSBC estimates, is tiny compared with the 24
trillion yuan onshore bond market, excluding CDs.
But it far exceeds the amount of overseas investment in
mainland bond markets under the main RQFII and QFII quota
schemes set up for qualified foreign institutional investors.
And while total foreign investment in China's bond market -
including foreign institutions buying on the interbank market -
would be difficult to estimate, overseas participation remains
severely limited by capital controls as China fears unrestricted
fund flows could disrupt its economy.
That will inevitably change, given China's ambitions to be a
major player in global financial markets with a global reserve
currency, and it is steadily developing and expanding channels
to let foreigners invest directly in its capital markets.
Against that backdrop, China's top securities regulator Guo
Shuqing stirred up worries over dim sum bonds' future last week
when he said the Renminbi Qualified Foreign Institutional
Investor scheme, launched a little over a year ago to boost
foreign portfolio investment in the mainland, could be expanded
The programme, which started at just 20 billion yuan with a
focus on investment in the mainland bond market, was boosted to
70 billion yuan last year to allow investments in the stock
market through exchange-traded funds.
While some analysts doubt that China would actually expand
the RQFII programme at the dramatic 10-fold pace that Guo
suggested, market players say that even such a drastic increase
- which would catapult the RQFII scheme past the size of the dim
sum market and even the overall volume of offshore yuan deposits
- would be unlikely to take the steam from dim sum bonds.
At the time of RQFII's initial launch, analysts note,
foreigners gave only a lukewarm reception to onshore yuan bond
funds, in part due to the narrow scope of bond products
available on the mainland.
"Investors are rational and they are still buying in the CNH
(offshore yuan) market," said Sean Chang, head of Asian debt
investment at Barings, adding that investors would choose which
market to enter depending on the risk profile they are seeking.
And while yield spreads remain a key potential disadvantage
for dim sum bonds, with the benchmark 10-year government bond
onshore enjoying a premium of around 50 basis points
over the offshore equivalent, the gap has
narrowed substantially over the past few years.
Analysts believe the spread will tighten further as
cross-border channels for yuan flows expand, and the pace is
likely to accelerate as China loosens the reins on its capital
For some bonds, especially in the high yield sector, the
dynamics are changing and some offshore yields now exceed their
onshore counterparts, as Europe's debt crisis and slowing global
growth dampened investor appetite for risk in the offshore
market last year.
Shandong Chen Ming Paper Holdings Ltd's 2014 dim sum bond,
for example, is now trading at 8.741/11.613 percent, while its
2017 onshore bond is only trading at 5.13/5.23 percent.
Foreign investor interest in the onshore market may focus
mainly on bonds issued by the Chinese government and policy
banks if the quota is expanded, said Yang Xi, a fixed-income
analyst at Citic Securities.
Familiarity is another issue with foreign investors, who
often know little about Chinese issuers and are wary that most
in the onshore market lack a credit rating from an international
rating agency. In the offshore market, however, issuers with
international ratings accounted for about 72 percent of total
issuance volume last year, up from 49 percent in 2011, according
to Bank of China International.
The offshore and onshore markets are also both getting a
lift from a quickening in the yuan's appreciation, which
analysts forecast at around 2 percent to 3 percent for the whole
of this year compared with 1 percent in 2012. Long positions in
the yuan have reached a two-month high, a recent
Reuters poll showed.
The premiums of dim sum bond yields over the average yield
for Asian local currency bond and over Asian U.S. dollar bond
yields are also attractive, not just for the Hong Kong investors
but also for global investors, Barings' Chang said.
The HSBC dim sum bond average yield stood at
3.58 percent on Wednesday, while the bank's Asian dollar bond
average yield was 3.47 percent.
Chang expected the total return of dim sum bonds this year
to reach 5 to 6 percent, including the foreign currency gain,
well above his forecast for the Asian dollar bond market.
($1 = 6.2198 Chinese yuan)
(Editing by Edmund Klamann)