China is going global, and so is its currency. The renminbi officially entered the International Monetary Fund’s basket of global reserve currencies on October 1, and barely a week goes by without talk of major reforms to open some aspect of the country’s capital markets to the world.
While questions linger over the direction of the renminbi against the US dollar – following last year’s shock devaluation – global interest in Chinese bonds is building. In a yield-starved world, the onshore market offers positive interest rates that are widely expected to fall as the central bank continues to stimulate a cooling economy. International allocations to onshore Chinese bonds are pitifully small relative to the size of the economy, suggesting that the liberalisation of access will have real results.
All this presents an enormous opportunity for capital markets participants. As barriers come down, Issuers – both from China and elsewhere – stand to benefit from access to a broader investor base, while investors will gain some welcome diversification on both sides of the border. Underwriters, too, are looking to capitalise on growing interest in Panda bonds to establish a foothold in China’s vast domestic market.
There are, however, serious challenges to consider, and a full understanding of the regulatory environment and credit risks will be essential for anyone looking to increase their exposure to renminbi bonds.
IFR Asia brought together a panel of experienced bankers, investors, analysts and lawyers to debate the outlook for renminbi bond markets, both onshore and offshore.
While the speakers emphasised the importance of the offshore renminbi format, downplaying fears of the demise of Dim Sum bonds, the opening of the mainland markets dominated the discussion.
Of particular interest was the prediction that onshore bonds would be included in at least one major global bond index by the end of 2017, potentially attracting as much as US$600bn of additional inflows as funds adjust their allocations to track the benchmark.
The debate also highlighted questions over credit quality in the mainland market, where the prevalence of Triple A local ratings complicates efforts to distinguish between issuers at a time when government support is waning.
Panellists left in little doubt that foreign borrowers would be a welcome addition to the Chinese onshore arena, drawing demand from both domestic and foreign buyers, once rules allowing wider market access are confirmed.
Numerous questions remain around the regulatory framework for foreign investors and issuers looking to do business onshore. Accounting standards are still a hurdle, and approvals unpredictable.
But these hurdles are already shrinking, and in years to come may disappear entirely.
One equity strategist at a recent investor forum described the onshore Chinese bond market as the biggest opportunity in the global capital markets today. From the discussions shared at the latest IFR Roundtable, it is hard to argue with that assessment.
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