No room for Dim Sum nostalgia

IFR Asia 895 - May 30, 2015
6 min read

I never was much of a fan of the offshore Dim Sum renminbi bond market. Looking back on a column I wrote back in 2011, the sentiment expressed there was that the Dim Sum market was little more than a call on the foreign exchange value of the renmbinbi.

Long tenors were not available given the unwillingness of any counterparty to make a swap price longer than five years, and the three-year mark was very much the norm.

That didn’t prevent the Dim Sum market from becoming the must-have fixed-income fashion accessory and the proverbial printing press was running at pace, particularly during those times when the G3 offshore market shut down. Reams and reams of the stuff were printed.

Looking back on that column decrying the Dim Sum dreams, I felt a wave of nostalgia for the old term “risk-on/risk-off” – a rather charming description for the Dim Sum market’s ability to offer an issuance window when all others slammed shut. Of course, in the fast-moving world of capital markets, nostalgia is often a source of embarrassment, and this is no exception.

Were we really citing RoRo with abandon to explain what was happening back then, when equities or bonds sold off over a few days and then roared back with alacrity? I’m afraid we were. In its defence, there was an underlying science of sorts. You see, asset classes were remarkably correlated in the days when markets were searching for some sort of normality in the wake of the financial crisis.

The one that wasn’t was Dim Sum, hence the printing press which allowed tens of billions of dollars equivalent to come to market when the offshore G3 market stumbled. Much of it has been retired without a squeak, but new issuance in the product today has all but collapsed.

THAT CAN BE blamed on my original gripe about the shaky foundations of that market: the renminbi has softened in the face of China’s weakening economy and is no longer a straight call option. Crumbling offshore liquidity has also played its part in transforming a market that broke records last year, with a total print of more than US$50bn-equivalent. Volumes in 2015 are around a quarter year-on-year of what they were this time in 2014.

An interesting phenomenon which emerged on the back of the pull-back in Dim Sum issuance was a surge in issuance in the offshore Taiwan renminbi market, where “Formosa” bond issuance was driven by strong local demand favourable arbitrage on swaps back into US dollars.

Banks are always the niftiest at acting on such arbitrage opportunities and a ream of them took advantage of the swap opportunity, with Deutsche Bank leading the way with a jumbo renminbi Formosa a few weeks back.

The swap no longer looks so beguiling, but it’s likely that the Taiwan renminbi market is firmly on the radar screen for issuers looking to diversify their funding sources. With renminbi deposits growing outside mainland China, the story will gain pace and it’s a given that in the near future we will see renminbi issuance emerging from other offshore centres. I’m thinking Singapore in this regard as the next candidate.

But the rise of offshore renminbi liquidity, which has emerged as trading centres such as London, Singapore and Taipei have accumulated ever-growing deposits in the currency, has coincided with a new orthodoxy that sees the Chinese unit losing value over the medium to long term.

So long renminbi/short dollar positions which were in vogue thanks to the positive carry they returned are being unwound. The consensus now says that the Chinese authorities will widen the renminbi’s trading band with a view to engineering a long-term depreciation as China’s economy threatens to break the symbolically significant 7% annual growth clip.

A FAIR NUMBER of bankers I spoke to this week reckon that the Federal Reserve’s long-anticipated interest rate hike, perhaps this autumn, at a time when China’s growth is slacking, raises the possibility of a 5% depreciation of the Chinese unit.

So despite the efforts of bankers involved in the renminbi-denominated offshore bond markets to claim the sagging of the Dim Sum market is a glitch and to talk up the emergence of alternative centres of offshore renminbi bond issuance, I reckon it’s going to be something of a slow burner.

Another factor to be considered is the growing tendency of renminbi liquidity to find its way into the domestic markets, where yields have risen to attractive levels and where investors have a broad swathe of credits to choose from. That dynamic removes a big part of the bid that in the past had given the offshore market its critical mass.

But to go back for a minute to RoRo. Everyone has been watching and waiting for the great moment of reckoning when global equities would pop and bring with them overvalued fixed income assets as the final phase of Fed normalisation after the withdrawal of quantitative easing got underway.

Well we are not there yet. But if the global bond bubble does indeed burst later this summer on a Fed move, I find it unlikely that the renminbi will prove the haven it was of yore. That nostalgic idea that RoRo will protect the Dim Sum market is starting to look seriously outdated.

Jonathan Rogers_ifraweb