Wednesday, February 11, 2015
in partnership with
Approximately 35 members of the Luxembourg CFA Society gathered at the Sofitel in Kirchberg to listen to an interesting presentation on the Renminbi Bond Market by Prof. Jot Yau (Seattle University), Glenn Ko (UBS), and Bing Li (ICBC).
Jot Yau and Glenn Ko (pictured left) began with a review of the evolution of the Offshore Renminbi Bond Market (aka Dim Sum Bonds). The market first appeared in 2007 with an issue in Hong Kong, and a total of 5 bonds were issued in 2007. The market has developed significantly since 2007, with 191 issues in 2014, with Hong Kong remaining the leading market. At the same time the market has been diversifying with issuers from industry, and governments. The tenor of the bonds remains short term, with 80% of the bonds being of 2 or 3 years. 38% of the bonds are rated with the interesting anecdote that the funding cost of the rated issues is higher than the non-rated issues. Glenn Ko put forward the theory that this is a result of the more credible issuers feeling that they don’t require a rating, so it is the lower quality issuers that have their bonds rated. Of the bond issues, 51% are listed on exchanges, with the top exchanges being Hong Kong, Singapore, Luxembourg, London and Dublin. Investors in the bonds are mostly in Asia (88%), with the remainder (12%) in Europe.
There is an increasing demand for Renminbi, which has risen to 5th in a ranking of currencies used to settle international payments from 13th one year earlier. With the tightening of the Chinese economy, the offshore market has become more attractive to Chinese issuers. In comparison to the USD bond market there is less liquidity and issuances are smaller – investors tend to buy and hold – however the presenters expect the market to continue to grow.
Bing Li then gave a presentation on the onshore Renminbi bond market, which is the third largest bond market in the world, after the US and Japan – and at USD 5.75tn much larger than the offshore market. The development of the bond market has reduced reliance on banks for financing. A series of reforms starting in 1981 have gradually opened up the bond market, by creating different markets for trading, eventually leading to opening up to individual savers (in 2002) in the OTC market. The interbank market dominates the other markets and commercial banks dominate most of the markets. Of the bonds issued, 60% of the value is rated AAA, with defaults being exceedingly rate in China. The first default occurred in 2014, when an issuer was unable to make payment, however that payment was later rectified. Yields are 3-4.5% for maturities up to 30 years. Questions from the audience followed and further illuminated the potential of this category of investments.
Written by: Iain Hackston, CFA