Investors flock back to feast on dim sum bonds

Renewed renminbi appreciation has seen investors flock back to the dim sum bond market once more, with issuance more than doubling month-on-month in November.

Over $1 billion in offshore renminbi, or CNH, bonds was issued by eight entities last month, compared with $480 million in issuance the month before, according to data provider Dealogic.

This coincides with greater confidence in RMB appreciation, with the currency having risen by more than 2.6% against the US dollar between July and November, by Bloomberg data.

This is supported by stronger economic data from China. In November, HSBC’s flash China manufacturing Purchasing Managers’ Index hit a 13-month high of 50.4, as reported, lessening fears of a hard landing. A figure above 50 represents expansion.

Chia-Liang Lian, head of investment management for Asia ex-Japan at Western Asset Management, also points to the relative attractiveness of coupons for dim-sum bonds.

The average yield of Chinese government bonds and investment grade corporate debt has risen to around 3% as at October, from around 1% in April last year, according to HSBC data.

“Compared to the returns you get from deposits from a yield perspective on CNH terms – call it 3-4% depending on which bond you get. I don’t think it’s unattractive for individual investors with high-cash [levels], compared to the returns you get from deposits,” says Lian.  “On top of that, you have potential for currency appreciation.”

Linan Liu, strategist at Deutsche Bank, predicts that the renminbi will appreciate by 2-3% against the US dollar next year. This is based on the bank’s expectation that China’s economy will expand 8.2% next year, alongside a 10% acceleration in exports. A potential widening of its trading band from 1% to 2% may also spark interest among investors.

Last month the dim sum bond market made an average return of 1.7%, of which around 60% was due to RMB appreciation with coupons accounting for the remainder, by HSBC data. This compares with a 0.9% return for local currency bonds.

But the recent CNH bond rally masks the fact that issuance has barely grown at all this year. By Dealogic data, $13.52 billion has been raised in the offshore RMB bond market year-to-date, compared with $13.47 billion over the same period last year.

Partly this can be explained by a slowdown in the Chinese economy, which grew 7.4% year-on-year in the third quarter, from 7.6% in the previous three months and a slide from 10% plus in the previous three decades.

The Organisation for Economic Co-operation and Development has slashed its growth expectation for this year to 7.5%, from its previous 8.2% forecast.

The slowdown created downward pressure on the currency, which depreciated by 1.7% against the US dollar between May and July. This made RMB-denominated debt less attractive.

But Crystal Zhao, fixed-income analyst at HSBC, disagrees that investors are solely seeking to capitalise on appreciation by buying dim sum bonds, suggesting they have become more selective on individual credits – different to a year ago.

“If you look at the yields, we have seen the [corporate bonds] outperform government bonds,” says Zhao. “When people choose, for example, why do they choose high-yield? Because they want the yield to pickup when the world is in a low-yield environment.”

HSBC data show that high-yield and non-rated corporates were yielding around 6% by the end of October, versus 3% for government bonds. “If they just want to have RMB, why [don’t] they choose to buy lower-risk [investments], for example government bonds or international or multinational names?” says Zhao.

Nevertheless, she agrees that the development of the dim sum market relies on RMB appreciation to some degree. “It’s still one of the drivers, but it won’t be the dominant one in [future],” she says.