LONDON, Feb 7 (IFR) - Do you feel SAFE?
The answer was clearly 'no' for many sovereign,
supranational and agency issuers this week, which shied away
from launching new benchmark deals as one of their largest
investors - China's State Administration of Foreign Exchange
(SAFE) - took some time out to welcome in the year of the horse.
The volatile market backdrop was not exactly ideal for new
issuance anyway, but this has rarely stopped the savviest bank
originators from getting some business off top-rated clients
with their timeworn flight-to-quality mantra.
Even before the week began, however, the writing was on the
wall for primary activity, with Lunar New Year celebrations on
"It would definitely be a risk to launch a new benchmark
with one of the largest investors in the world absent," said one
head of SSA syndicate last Friday.
As it turned out, the only meaningful issuance came in the
form of a very euro-centric arb trade from KfW, a domestic-led
FIG/SSA hybrid deal from Italy's Cassa Depositi e Prestiti, and
a handful of short-dated floating-rate notes which SAFE,
according to syndicate bankers, does not traditionally buy.
Despite the best efforts from bankers to try to persuade
their clients not to rely too heavily on the increasingly
secretive SAFE, the lack of issuance demonstrates how beholden
the market is to one investor.
SAFE has been the largest investor in SSA products over the
last years in the two major currencies of US dollars and euros,
outmuscling Norway's oil fund, say bankers.
The entity, which manages China's USD3.8trn of foreign
exchange reserves, has been known to place orders of up to
EUR2bn (USD2.7bn) on a single SSA debt issue, said market
It was not always that way, however. It took the appointment
of star Pimco portfolio manager Zhu Changdong in 2010 to start
to diversify its investments away from US Treasuries.
Not only did the arrival of the low-key figure known as the
"invisible man" shift the focus toward spread products and
corporate debt, it also changed SAFE's entire approach to
Syndicate bankers say that before Zhu's arrival SAFE would
be one of the first investors to express early interest in a
deal, giving issuers comfort of large anchor orders before they
formally opened books. Now, salespeople struggle to get any
feedback from SAFE, and are often shocked when it places chunky
orders late in the bookbuilding process.
Sometimes this can help to bail out struggling deals, but
other times it can cause allocation migraines.
Reuters reported last week that Zhu is set to leave his
position, raising the question as to whether his legacy will
The more pressing question for issuers, however, is whether
SAFE is going to continue its love affair with US
The onset of the US Federal Reserve's quantitative easing
programme has sent shockwaves through the market, creating
uncertainty around where Treasury rates will stabilise. Bankers
say SAFE's participation in recent dollar SSA deals has been
declining in recent months.
Then there is China's own agenda of trying to rebalance its
The government wants to reduce its reliance on the
investments and exports that have fuelled breakneck economic
growth over the past three decades in favour of consumption and
services to generate more sustainable growth.
Theoretically, this could encourage China to reduce its
holdings of foreign reserves, removing the cap which has kept
its currency from rapidly appreciating. The resulting
inflationary pressures would hit exports but could bolster
domestic consumer spending.
These are not immediate problems for SSA issuers, however.
The bark of Fed tapering has proved to be much worse than its
bite - a further USD10bn of tapering confirmed last month was
barely felt in the Treasury market, and China's economic
rebalancing act will play out over decades to come.
As this week proved, SAFE remains the most influential
investor in the SSA market whether that is healthy for the
market or not.