The offshore renminbi bond market has long been a simple beast. When the Chinese currency rose, such credit would perform well. When the renminbi fell, the bonds – known better as “dim sum bonds” – would falter, and new issuance would evaporate.
However, that pattern appears to have been broken. Over the past two months, the renminbi has suffered a sharp, unexpected turn – falling to its lowest against the dollar in more than a year. Against the euro, the currency of China’s biggest trading partner, the renminbi has dropped to levels not seen since 2011.
Yet the dim sum bond market has barely blinked. In the year to date, companies have raised $10.8bn in offshore renminbi bonds – including both Hong Kong and Taiwan issued debt – more than double the amount during the same period last year, according to Dealogic. April alone saw $2.5bn of new issuance, in spite of the currency weakness.
Some of that activity has been driven by refinancing needs. A lot of two- and three-year debt was raised in 2011 and 2012, giving the market some built-in issuance as those expired. And it has not been plain sailing for all borrowers. Two market segments in particular – Russian banks, which tapped the market aggressively last year, and Chinese property developers – have both suffered due to sector specific concerns.
But the broader market has been solid. Average yields, as tracked by HSBC, rose 26 basis points in the month of March, but have now tracked all the way back down to 4.18 per cent, where they were when the renminbi sell-off began in mid-March. Bankers say that a change in the type of investors looking at the market has helped to steady the ship.
“It’s not a mature market. It’s still growing up,” says Andrew Stephen, head of Asian local currency issuance at Deutsche Bank. But the arrival of more “professional, sophisticated investors”, and the continued issuance activity during renminbi weakness are “signs of being a proper market”.
Increased interest from global funds in search of higher yields has been the biggest source of support for the market, even for those not looking for renminbi exposure.
Some have chosen to invest in the debt while reducing the currency risk by selling renminbi in the forward market. By doing this, investors can buy investment grade credit – sometimes from western companies such as Caterpillar or Unilever – but get an extra yield pickup of about 30-40 basis points, says Massimo Guiati of AZ Fund Management.
“We live in a world where it’s hard to find any yield. This is why dim sum bonds offer an opportunity,” he says. Some investors have also found solace in the fact that the renminbi sell-off has been driven by the central bank rather than the market.
Many forex analysts still believe that the renminbi will end the year stronger, implying that a bounce will come sometime this year.
For many investors, that has made dim sum bonds an attractive option as a way to profit from future appreciation, especially as increasing use of the Chinese currency around the world has given managers more funds to deploy into renminbi assets.
Crystal Zhao, fixed-income analyst at HSBC, recommends that clients look to buy bonds if the renminbi hits Rmb6.3 against the dollar. It is currently at Rmb6.22.
The broader move back into emerging markets has also been supportive. Investors have put money into emerging market bond funds for the past five consecutive weeks, according to data tracker EPFR.
These factors are likely to help the dim sum bond market break the record for annual issuance of $13.1bn set in 2012.
However, the old complaints about the market remain. Though investment banks and brokers have been more active in trying to spur trading, buy-and-hold investors still dominate, leaving thin liquidity for the rest.
Two-thirds of the total market consists of short-term certificates of deposit rather than bonds, which have little attraction for trading. And sustained currency weakness could yet prove a drag on the market if it defies expectations.
“You have more and more people, especially on the private bank side, who have deposits or insurance in renminbi. Assets are increasing, so definitely there are more participants,” says Mr Guiati. “Does that mean we have a more mature market?
I think that is still some time away.”
德意志银行(Deutsche Bank)亚洲当地货币债券发行业务主管安德鲁?斯蒂芬(Andrew Stephen)说：“这不是个成熟的市场，它仍在发展。”但是，更多“专业老道投资者”的到来以及人民币疲软期间持续不断的债券发行活动，都“说明这个市场是合格的”。
一些人选择投资人民币债务，同时在远期市场上出售人民币来降低汇率风险。AZ基金管理公司(AZ Fund Management)的马西莫?圭亚蒂(Massimo Guiati)说，这样一来，投资者就可买入投资级债券（有时是由卡特彼勒(Caterpillar)或联合利华(Unilever)等西方企业发行的），同时获得约30至40个基点的额外收益率提升(yield pickup)。