CNH bond inflows tipped to continue

Sep 12, 2013

Despite the broad exodus from emerging market debt, offshore renminbi bonds have attracted flows and are expected to continue to benefit from renewed investor interest.

Amid the emerging markets sell-off this summer, there has been a bright spot in the Asian local-currency debt markets – offshore renminbi, or CNH, bonds – and bankers argue that flows will continue into those instruments for the remainder of the year.

Venkat Rao, an associate in Asia debt syndicate at Bank of America-Merrill Lynch, says money will continue to re-allocated to CNH bonds in light of their recent improved performance.

CNH or ‘dim sum’ bonds – which are issued in Hong Kong – posted a return of 0.8% in August. Only Korean won-denominated bonds did better, with returns of 1.2%. These rises were in sharp contrast to the performance of other local-currency bonds – for example, Indian and Indonesian sovereign bonds, fell between 11-12% as their yields widened dramatically.

“Almost every investor had some allocation into emerging market bonds during the first half of this year, targeting high growth and high returns,” Rao tells AsianInvestor. “With the CNH rates and currency both having out-performed emerging markets over the past three months, we have started to see some of those emerging market outflows moving into CNH bonds.”

For example, Indonesian 10-year government bond yields increased sharply to 8.79% as of September 10 from 7% on July 1, while CNH 10-year bond yields rose 40 basis points in the same time frame.

And dim-sum bond appetite is also clearly there for new issues. China’s ministry of finance in June sold six tranches of maturities ranging from three years to 30 years.

The resilience shown by CNH bond prices will make them attractive to EM debt investors for the foreseeable future, especially as prices in almost every other local market in Asia have fallen, agrees Wong Ken-wei, Asia-Pacific head of fixed income syndicate at Barclays Capital.

Continuing appreciation of RMB against the dollar, as well as investors becoming increasingly comfortable with investing in the mainland, should also provide support to the CNH bond market, Wong adds. The renminbi has risen 1.9% to 6.1183 against the dollar, in the year to September 11.

“We saw very active buying from private banks coming into the market to buy [CNH] certificates of deposit, and medium-term notes in private placements in the past couple of months even though primary public market issuance has slowed down,” Wong says. “The diversity of investors [in CNH bonds], as well as issuers, has increased in the past year.”

For the first half of the year, CNH bond issuance hit RMB183 billion ($29.9 billion), already exceeding the RMB173 billion issued in the whole of 2012.