Rationale for CNH bond boom examined

The stars are aligning in support of explosive near-term growth in dim sum bonds, with Standard Chartered anticipating a five-fold year-on-year increase in the size of the market by the end of 2011.

Tailwinds include potential regulatory relaxation as well as the scarcity of comparative yield-bearing alternatives in a volatile trading environment. Cumulative factors are being tipped to drive demand for CNH bonds, deepen liquidity and lead to a lengthening of durations.

“I believe the dim sum bond market is one of the very few still open for business,” argues Tee Choon-hong, Standard Chartered’s head of capital markets for Northeast Asia.

The bank is forecasting the CNH bond market will top CNH200 billion by the end of this year, having started the year at just under CNH40 billion. Year-to-date it stands at CNH138 billion.

As evidence of the market’s acceleration, Tee notes that August alone saw CNH35.7 billion in bond issuance – close to the issuance volume of CNH bonds in 2010 – with US dollar-denominated high-yield bond markets having remained shut since June.

“Fears of a US economic slowdown and the political gridlock in dealing with US fiscal woes have led to the closure of US dollar-denominated primary bond markets,” he points out.

The bank notes that with the new-issue pipeline in G3 currencies effectively closed, issuers – particularly Hong Kong-listed Chinese issuers – have turned to the dim sum bond markets to meet their needs.

Moreover, Chinese regulators appear poised to extend their support for the growth of this young market. At present, remittance of RMB is approved on a case-by-case basis and this process has led to issuance bottleneck for dim sum bonds, notably among multinational corporations (MNCs) that need to send proceeds back to support operations in mainland China.

However, last month China’s commerce ministry published a draft paper for discussion on current rules governing CNH foreign direct investment. The indications are that the approval process for CNH remittances may soon be streamlined, which should drive interest in the market.

MNCs that still make up a minority in the CNH bond universe will play a bigger role and “more importantly will attract more international participants to the CNH market”, adds Tee.

Diversification of investors will also be key. “The CNH market will develop in a way that is similar to best practices elsewhere – such as the Eurodollar bond market – in terms of documentation, settlement and disclosure,” he says.

The investor-base is expected to continue to grow in particular in Hong Kong and Singapore among commercial and private banks, insurance firms and corporates.

Further, Tee points out that fund managers are becoming increasingly involved in the dim sum bond market. Air Liquide Finance recently issued five- and seven-year CNH bonds, and fund managers made up 74% of the investor base of its five-year issue. Private banks, meanwhile, accounted for 12%, commercial banks 10% and insurers 4%.

While new CNH bond issuance is still typically on a three-year tenor, longer durations are gradually creeping into the market, with Bosch & Siemens having recently priced a CNH2 billion deal in three-, five- and seven-year tranches.

“This lengthening of duration from high-grade issuers would definitely fit better into the portfolio of insurance companies,” adds Tee.