How domestic investors support China’s US dollar bond market
China bond investors utilize leverage to maximize investment return on US dollar bonds from Chinese offshore issuers
The escalation of the US-China trade war and the renminbi depreciation had an impact on the US dollar bonds sold by offshore Chinese issuers, which then resulted in a widened credit spread. However, due to a prevalent sense of confidence among Chinese offshore issuers, the offshore Chinese credit market is unlikely to see a continuous selloff despite short-term volatility.
“Chinese investors, as a whole, think Chinese companies have relatively good credit quality, and the chances of default have been over-estimated by the market,” says a managing director at a Swiss bank in an interview with The Asset.
According to financial data analytics company Credit Benchmark, Asian corporates have all improved in credit risk over the last year, with Chinese corporates achieving the second-largest improvement.
An investment tool commonly used by Chinese investors to maximize exposure and make better use of investment quotas is utilizing leverage provided by investment banks. “Chinese investors say that should there be a problem, the Chinese government might bail out Chinese investors but probably not international investors,” says the managing director.
In a bid to build the yield curve for Chinese offshore bonds, ChinaBond launched its ChinaBond Investment Grade Chinese Offshore USD Bond Index in early July. On August 4, when the US dollar-Chinese renminbi exchange rate crossed the seven-to-one level, the index showed that the yield curve of investment-grade Chinese offshore USD bonds had narrowed across all tenors and ratings.
Onshore investors eyeing offshore credit are subjected to a limited qualified domestic institutional investor (QDII) quota. Yet, through investment banks, onshore investors are able to leverage up their offshore investments and make efficient use of their quotas. For Chinese bond investors, state-owned companies, LGFVs and high-yield property companies are attractive in terms of risks and returns.
“For investment banks, servicing Chinese clients means providing leverage to maximize their investment quotas and to give them exposure to whatever they want,” says the banker.
In addition, offshore investment banks such as Goldman Sachs and J.P. Morgan are also beefing up their high-yield product offerings in Chinese offshore US dollar bonds as a market maker. In particular, high-yield bonds from property developers have also gained traction from non-Chinese investors including private banks.
“There is a lot of demand for papers in the 1-3 year tenor range because investors are not worried about whether large developers are going to default or not,” says a managing director at a French investment bank in an interview with The Asset.
20 Aug 2019