More dim sum to come from mainland SOEs

Oct 21, 2013

Mainland state-owned enterprises are set to pique appetite for dim sum bonds through new issuance, as China moves towards RMB internationalisation, Moody’s forecasts.

China will put more dim sum bonds on the menu this year, with the new supply of offshore renminbi-denominated debt to include issuance from state-owned enterprises, predicts Moody’s.

The rating agency points to China’s desire to encourage greater RMB flows in and out of the mainland, as it gradually moves towards internationalisation of the currency.

Investor appetite waned for dim sum bonds during the summer amid an emerging markets sell-off, with only $505 million of dim sum bonds issued during Q3 2013, compared to $4 billion in the previous quarter, according to data provider Dealogic.

However, issuance is expected to pick up with the encouragement of the Chinese government, which aims to increase the number and broaden the types of mainland companies that can issue the bonds, according to Moody’s.

In doing so, the government hopes to help attract institutional investors seeking RMB-denominated investments to the asset class.

For state-owned entities, dim sum bond issuance would help them to raise capital amid a bottleneck in the domestic capital markets.

Selling stakes in SOEs to private equity investors is also not an easy task. Foreign PE firms in particular have faced unpopular domestic public sentiment when trying to make acquisitions.

The central government will likely allow regional or local government SOEs, which have no experience in raising offshore capital, “to tap the dim sum market directly without going through the usual regulatory approval process for offshore US dollar bond issuance", says Moody’s.

However, it adds that the credit quality of the SOE-issued bonds would be tied to the governments that own them. The governments have limited information available on their financial position, although transparency is gradually improving.

Five large SOEs have previously been allowed to issue dim sum bonds through a pilot project in 2011, with China General Nuclear Power, Baosteel, China Huaneng, China Minmetals and China Datang taking part.

Only Baosteel, one of China’s largest steelmakers, has used its full quota of Rmb6.5 billion ($1 billion) as of October 11 with the others still short of their issuance quota, according to data from Bloomberg and Wind Information.

Baosteel and China General Nuclear Power are also the only SOEs of the five to have ratings – of A3 stable and A3 negative respectively – while the others are unrated.

The HSBC Offshore RMB Bond Index was up 0.72% in September. HSBC forecasts that dim sum bonds could offer a full-year return of 5-7% as economic growth continues to pick up.