Even though the issuance of offshore RMB bonds and their outstanding volume have broken records, the experts point to relative shortage of longer-tenor bond issues, lack of issuer diversification and still tight capital flow controls in and out of China, as areas for improvement if the sector is to boom.

 

The prevalence of bonds of shorter tenors is a function of the maturity of the sector, according to Cecilia Chan, chief investment officer, HSBC Global Asset Management.

 

“It’s good for market development, especially if it’s a new market, if people don’t know it that well or are sceptical about liquidity and performance,” she says. The sector, however, has matured enough that we should be seeing bond issues with longer tenors now, she added.

 

Major Singapore companies, particularly in the property sector, are subject to China’s regulatory restriction on repatriation of RMB funds back to China, says Terence Chia, head of debt capital markets, ICBC Singapore. Smaller companies, on the other hand, increasingly often find that the market is interested mostly in large issues, RMB1 billion or more, making it costly to borrow smaller amounts, in line with their needs. “We need to backtrack to more issues of RMB400-500 million,” he says.

 

Tax incentives can encourage bond issuers to issue longer-term bonds, Chia says. The Qualifying Debt Securities scheme of the Monetary Authority of Singapore, which exempts certain bond issues from withholding tax on the interest, can provide an example of such incentive.

 

Hong Kong was the first offshore RMB centre. Today the volume of RMB bonds held under custody in the territory amounts to RMB370 billion, or 90% of the total issues of these securities in the world, according to Philip Li, managing director, China Chengxin Credit Ratings.

 

Hong Kong attracts mainland Chinese issuers, thanks to its better regulatory environment and because they can borrow here at a lower cost. Regulatory approvals for repatriation of the funds are still an obstacle to overcome for many issuers. Gradual removal of these restrictions should lead to more international issuers entering the market, providing diversification that investors will welcome.

 

Taiwan seems to be ahead of other Asian markets in terms of the development of offshore RMB bonds, according to Matthew Liaw, head of global structured finance division, CTBC. A recent deregulation excluded foreign-currency Formosa bonds from the overseas investment limit of 45%, imposed on life insurance companies. This has spurred issuance of higher-tenor offshore RMB bonds, which life insurance companies prefer.