Asia-Pacific investors are upbeat about the growth of the renminbi onshore and offshore (Dim Sum) bond markets, according to a regional cross-sector investor survey by Fitch Ratings. Investor optimism in the Dim Sum market has remained intact despite the drop in corporate issuance this year.
As many as 77% of our survey participants expected both the on- and off-shore bond market to increase by between 25% and 50% in the year ahead. This optimism was accompanied by 55% of respondents highlighting the Chinese renminbi's appreciation potential as a key driver of interest in local-currency markets - a stronger level of currency confidence than for all other regional bond markets.
Investor optimism has been borne out by the robust Dim Sum issuance in the first nine months of 2013 when it rose to CNH41bn, up 70% from CNH24bn for the whole of 2012, based on Bloomberg data.
Investor optimism and market buoyancy masks one potentially adverse trend in the Dim Sum market: the year-to-date increase in gross issuance has been driven entirely by financial institutions (CNH33bn) and in particular a doubling of issuance by Chinese financial entities (to CNH27bn). Excluding this, all other Dim Sum issuance was considerably lower (CNH8.4bn) than last year (CNH11.4bn).
The drop in issuance by corporations, which includes both Chinese entities as well as multinationals, was particularly sharp (down 38% year-on-year). The drop in all other debt- raising activity was precipitated by much lower foreign quasi-sovereign and supranational issuance (down 58%).
Lower corporate Dim Sum issuance may have resulted from several factors, including: broader emerging market risk aversion, lower investor interest as secondary market yields remain low relative to US dollar investment-grade issues of Chinese corporates and, higher onshore deposit rates in China. Corporate Dim Sum bonds typically are smaller in size than US dollar bonds, have shorter terms, and face regulatory hurdles in repatriating issue capital onshore. Fitch will shortly publish a report on recent corporate issuance trends in the Dim Sum market.
The jump in financial issuance could be a response to tightening onshore financial conditions, brought on by worsening asset quality and liquidity tightening by policy authorities.
The onshore renminbi bond market is far less open to foreign investors, but has seen steady issuance based on data from the Asian Development Bank (Asian Bonds Online). Issuance is dominated by the government, which includes obligations of the central and local governments, the central bank, and quasi-government institutions. The total amount of outstanding CNY bonds reached the equivalent of USD4tn in mid-2013, up from USD3.5tn in mid-2012.