Date
18 January 2017
Prime Minister David Cameron greets President Xi Jinping in 10 Downing Street. Xi's recent visit to Britain bolstered bilateral ties and created investment opportunities for both sides. Photo: Xinhua
Prime Minister David Cameron greets President Xi Jinping in 10 Downing Street. Xi's recent visit to Britain bolstered bilateral ties and created investment opportunities for both sides. Photo: Xinhua

What’s up next in the dim sum bond market

Chinese President Xi Jinping’s visit to the United Kingdom not only strengthened bilateral ties but also created business opportunities for both sides.

One concerns dim sum bonds, debt issued outside China but denominated in renminbi.

HSBC and other international institutions can issue renminbi-denominated bonds in China but it’s only now that an increasing number of Chinese companies including banks can issue offshore dim sum bonds.

Increased trading of such bonds will attract funds to domestic companies and speed up the development of the dim sum bond market.

However, uncertainties remain.

Since the stock market crash in June, investor confidence has been low.

Investors prefer to hold cash with part of the money that has flowed into the real estate market.

On Aug. 11, after Beijing devalued the renminbi, the Chinese bond market went up.

The question is why?

The central government has been using monetary easing to stabilize the stock market including cuts in interest rates and banks’ reserve requirement ratio.

The market consensus is that the central bank will continue to lower interest rates, leading to higher bond prices.

Meanwhie, capital flow to the bond market has been reasonable.

In addition, mainland firms, especially developers, have changed their strategy when issuing bonds in overseas markets.

In the past, during a strong renminbi, these developers did not have any preference for the type of bonds they sold, whether they were denominated in renminbi or other foreign currency.

When mainland banks tightened lending rules, they usually turned to Hong Kong to issue dollar-denominated bonds, taking advantage of relatively lower capital costs.

Hong Kong investors welcomed the move but higher returns encouraged overexposure and ultimately caused defaults in some cases.

Expectations of lower interest rates will persist in the coming years and lending rates will continue to fall with monetary easing.

Mainland developers have been issuing dim sum bonds to fund their business or repay dollar-denominated debt.

Because their revenue is in renminbi, these developers will be affected if the currency continues to depreciate. The cost to repay dollar bonds will increase.

Their gross profit margin is thin — less than 12 percent.

Renminbi-denominated bonds issued overseas to repay domestic debt can help save capital costs.

But the mainland’s bond market is as irrational as the stock market.

Five-year bonds issued by property developers such as Country Garden (02007.HK), Shimao Property (00813.HK), Vanke (02202.HK) have been well received by the market.

Vanke’s bond carries a lower interest rate than similar debt issued by China Development Bank.

The risk premium for corporate bonds is 10 basis points higher than similar debt issued by the Ministry of Finance Ministry.

The margin was 70 basis points at the beginning of the year.

This article appeared in the Hong Kong Economic Journal on Oct. 29.

Translation by Myssie You

[Chinese version中文版]

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MY/DY/RA

head of private banking and trust services at Hang Seng Bank

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