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Treasury & Capital Markets
How China continues to drive the G3 bond market in Asia
China continues to be a key driver of new activity in the G3 bond market in Asia, with Chinese investors accounting for a significant segment of the investor base and Chinese issuers taking a growing share of new G3 issuances in Asia.
Chito Santiago 1 Oct 2017
Jason Ho and Paul Au of CMB.
Jason Ho and Paul Au of CMB.

China continues to be a key driver of new activity in the G3 bond market in Asia, with Chinese investors accounting for a significant segment of the investor base and Chinese issuers taking a growing share of new G3 issuances in Asia.

Asian issuers in the past needed to access the 144A market and tap the US investor base to be able to meet their funding requirements. This is no longer the case. For the past few years now, the Reg S market is enough to provide the pool of liquidity needed to get the deal done.

One of the market developments that bolsters this landscape is the emergence of Chinese investors. And from just buying into Chinese deals – because of their familiarity with the credits – these investors are now also allocating funds to non-Chinese offerings.

“Chinese investors have become a potent segment of the bond investor universe,” notes Paul Au, managing director and head of the fixed income department at CMB International Capital Corporation. “They need to diversify, and we are seeing that among the Chinese asset and fund managers. They can’t just buy Chinese property assets all day long. They need to buy other asset classes as well, such as sovereign papers and Korean credits.”

And as far as the Chinese issuers are concerned, they are also becoming more sophisticated and are now more aware of market-driven transactions. “They’ve come a long way,” says Jason Ho, managing director and head of debt financing at CMB International. “They don’t just listen to their house banks – they now compare a lot more, which makes the sales and trading platform more crucial.”

Indeed, both Chinese issuers and Chinese investors are among the key drivers in the G3 bond issuances out of Asia. “We are seeing another record issuance in the G3 bond market in the region this year, and the pie is getting bigger,” says Au. “We are going to see more additional tier 1 (AT1) transactions and corporate hybrids. In terms of new issuance, about 65% to 70% of the activity comes from China, and that percentage is going to grow because the other markets are not growing as quickly.”

One of CMB International’s most recent transactions was the US$1.203 billion inaugural AT1 offering for Bank of Qingdao priced on September 12, in which it acted as a joint global coordinator, bookrunner and lead manager. The unrated perpetual non-call five deal, priced at par to yield 5.50% (against the initial price guidance of 5.70%), generated a final order book of US$3.3 billion from 77 accounts, and attracted a robust demand from non-Chinese investors as well.

According to Ho, the deal gained momentum subsequent to several rounds of marketing with the book already well covered around noon of September 12. “There was a big non-Chinese demand that followed, especially from fund managers, who came in the afternoon of the book building,” he says. “Even if the pricing was tightened by 20bp, almost all of the demand stayed in the deal.” The bonds performed in the secondary market and were quoted at 100.10 to 100.25 on September 15.

For Au, this is a good time to build the fixed income franchise of CMB International. He joined the bank in May this year with a mandate to grow the business. He was previously managing director and co-head of debt capital markets (DCM) and head of credit market syndicate at UBS and before that, head of debt syndicate at Citi. Since coming on board, he has hired a number of senior bankers, and the plan is to build a platform to complement the existing businesses of its parent company, China Merchant Bank (CMB), and to provide fixed income services to its clients.

“As we build our fixed income franchise, we will be bringing new issuers into the market, both in high yield and investment grade,” says Au. “We will bring to the table our experience and expertise, which exceeds that of the foreign banks because we have the China angle, which the foreign banks do not have. You have seen other Chinese financial institutions taking market share away from the foreign banks in the past couple of years.”

One of the recent senior hires is Ho, who joined from ICBC International, where he was most previously the co-head of DCM and head of debt syndicate. He spent the last six years setting up the offshore debt franchise to top the offshore Chinese league table.

With Au’s background working in an international platform and Ho from the Chinese platform, the two are working together to apply their varied expertise to expand the fixed income and DCM businesses at CMB International. “You need to follow good practice and procedure in order to sustain your business in the long-term,” Au points out.

Ho adds: “We want to optimize the way deals are being done and our clients can count on us in syndicating transactions. Our platform is still new, but I see a lot of potential for it to grow. We are a full-service platform with complete resources for primary issuances and secondary trading, which is a key to win the future debt businesses.”

In building the fixed income platform, CMB International will be leveraging on CMB’s onshore resources, including its strong private banking and asset management businesses, as well as its existing corporate relationships and distribution channels.

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