Slowdown in RMB appreciation to benefit dim sum market

The realisation during the past few months that the renminbi is not a one-direction currency that will appreciate for all eternity initially sent shockwaves through the markets as international investors suddenly had to factor in potential currency risk when making renminbi-denominated investments.

But participants at a panel discussion about the offshore renminbi bond market in Hong Kong yesterday argued that this new situation could help the market to mature by putting more focus on credit risk. Until now, investors have viewed offshore renminbi bonds — also referred to as dim sum bonds or CNH bonds — primarily as a renminbi appreciation bet.

“People no longer talk about a one-way appreciation trend and more attention is being paid to the credit worthiness of CNH bonds,” said Curt Lam, executive director of Yuexiu Property, at the RMB Rising conference hosted by AsianInvestor and FinanceAsia yesterday. “Previously, the appreciation issue was the most important factor in the decision-making process.”

John Sun, deputy head of fixed-income sales and trading at Citic Securities, also noted that when a trade is only going in one direction, it becomes a very crowded trade.

“At the end of 2010 all bonds traded up on day one, but as currency expectations have changed, the price movements have become more reasonable. I do expect this to result in more liquidity as we will see more sellers come into the market.”

So far, many investors have been buying dim sum bonds and holding them to maturity to benefit from the currency appreciation, which has resulted in a very thin secondary market.

This shift in focus should in turn drive more companies to seek a credit rating by one of the three major rating agencies (Fitch, Moody’s and Standard & Poor’s), the panel argued.

That trend is already under way as more issuers see the benefit of ratings in the form of better pricing and a greater diversification of investors. According to Ping Chew, managing director for Greater China at Standard & Poor’s, the number of rated issuers in the dim sum market increased by 25% to 30% last year.

“A rating is a natural progression of the market to make it appeal to a global investor base,” Chew said.

Sun at Citic Securities agreed and noted that issuers which have obtained a rating before launch tend to get a better response from European and US investors.

One example, he says, is Lafarge Shui On Cement, which is one of the best performing high-yield names in the dim sum market largely because it has a rating. The company, which is a joint venture between French company Lafarge Group and Hong Kong-listed Shui On Construction & Materials, sold Rmb1.5 billion ($237 million) worth of three-year bonds last November.

Sun acknowledged that some issues want to avoid getting a rating because of the cost and because the issuers don’t want to disclose too much information to the market, but as more and more investors require ratings, this will change, he predicted.

Sheldon Gao, president of China Universal Asset Management, added that at the moment only 12% of all dim sum bonds have a rating by one of the big three agencies. “This is a big hurdle for us right now,” he said, noting that many of China Universal’s investors will not invest in bonds that are unrated and some also require an investment grade rating.

“It is difficult for us to target those investors. Hopefully this year we will see more bonds with ratings as it will make our job easier,” he said.

At the same time, though, panel participants viewed the recent dip in the Chinese currency largely as a technical issue and argued that in the longer-term the renminbi will remain strong against the US dollar. However, for 2012 the general view seems to suggest a fairly modest appreciation of about 3% to 4% versus the US dollar.

The discussion was part of the third annual renminbi conference arranged by AsianInvestor and FinanceAsia and held at the Renaissance Harbourview Hotel in Hong Kong.

The conference focused on the internationalisation of the renminbi, which judging from the fact that extra chairs had to be brought in to accommodate listeners in the morning, is a topic that carries a lot of weight in the region.

Aside from prospects for the dim sum bond market, the conference also featured discussions and speeches about cross-border renminbi trade settlement, foreign exchange strategies, renminbi as a reserve currency, and offshore renminbi-denominated IPOs and equities.

Returning to the bond panel, the participants were optimistic that the dim sum market would continue to grow. Key drivers, according to Gao, include the fact that interest rates are still 2-3% lower in the dim sum market than in mainland China, making it cheaper for issuers to raise funds in Hong Kong.

It is also difficult for small and mid-size companies in particular to raise money in China. Meanwhile, the Chinese government encourages mainland companies and banks to issue dim sum bonds as they see this as an important step for the globalisation of this market.

The fact that China has relaxed restrictions with regard to the repatriation of offshore renminbi back into the mainland has also eased what was previously viewed as a major hurdle for issuers and will help support the growth of this market.

And 2012 has opened on a strong note with China Development Bank in the market now with a multi-tranche offshore renminbi bond that could raise as much as Rmb6 billion, including a Rmb1.5 billion 15-year tranche that priced overnight.

According to S&P’s Chew, the pipeline of potential mainland issuers for this year include state-owned enterprises, consumer companies, capital goods companies, resources companies and banks. “And that is on top of the foreign companies that are increasingly using the CNH bond market as a fundraising source,” he said.