China bond market opens, but will investors come?

Last month’s opening of the Chinese onshore bond market to most foreign institutional investors has sparked a lot of interest, but important questions must be answered before substantial capital will flow in, said panelists at a FinanceAsia forum yesterday.

Market participants want to see clarification on areas such as credit ratings, accounting rules, issuance and repatriation, and where investors stand in cases of state-owned enterprise bond default. All this is on top of existing concerns around corporate governance and transparency on the mainland.

How investors will respond to the opening up of the mainland interbank bond market was a major topic of discussion at the Borrowers and Investors Forum in Hong Kong.

“It’s a huge event,” said Devan Selvanathan, head of the debt platform in Asia for Natixis. But there is unlikely to be a massive shift from the offshore renminbi bond (CNH) market into the onshore one (CNY), he noted, especially as hedge funds are currently excluded.

Ultimately, many of the concerns stem from the differences between how the onshore and offshore markets operate.

For one thing, foreign players want to see a more coordinated rating arrangement between the onshore and offshore markets, noted Selvanathan.

There is a huge difference between how onshore and offshore rating agencies view risk, noted Terence Chia, managing director of the fixed income debt syndicate at Credit Suisse. “Onshore credit will be much more popular, but it will be quite different from the dim-sum [CNH] market.”

Julian Trott, head of the debt syndicate for Asia ex-Japan at Goldman Sachs, went so far as to say domestic rating agencies were “a major impediment” to foreign involvement in the market.

Differences between accounting rules are another obstacle. Chinese regulations do not currently accommodate the US Generally Accepted Accounting Principles, noted Anna-Marie Slot, partner at law firm Ashurst. “No doubt change will come, but there is a globalisation that needs to happen in China,” she said.

Moreover, where investors stand in the event of a default by a state-owned enterprise is still unclear, said Ivan Chung, head of Greater China credit research at rating agency Moody’s Investors Service. The few defaults seen in the past year or so have not shed much light on this, he added, and other panelists agreed that more defaults would help build a better picture.

Ultimately, foreign players still have many questions about the domestic bond market, noted Chung.

“Investors will still prefer to invest in dollars, and there is also a feeling that they will still prefer offshore bonds, which adopt the English rule of law,” he added. “We need further clarity in terms of issuance and repatriation.”

On the other hand, since the RMB devaluation last year, investor interest in CNH has declined, said Chia, and that trend may continue given the easier access to the onshore market.

In addition, the limited ability for issuers to get quota for the CNH market will also draw offshore money into the mainland market, said Goldman's Trott.

Speaking on another panel, Hayden Briscoe, director of Asia-Pacific fixed income at Alliance Bernstein, said the US fund house would not be rushing to invest in mainland bonds. It wanted to assess “how the transition from CNH to CNY is handled”.

Briscoe added that the market would like to see a standardised index for Chinese bonds; “that would speed up the development process”.