The renminbi bond markets are undergoing a dramatic transformation. As China continues with the gradual internationalisation of the currency, many foreign investors and issuers are getting their first chance to participate in the onshore renminbi market.
The arrival of Bond Connect in July has opened the world’s third-biggest debt market to the broadest possible range of investors, allowing funds to participate through their existing infrastructure even if they have no physical presence in mainland China, no foreign investor quotas and no onshore bank accounts. After a stage-managed first-day boost from offshore Chinese institutions, the scheme has quickly found its feet with the traditional global money managers, adding another vote of confidence in China’s internationalisation.
Global issuers, too, have won more access to the mainland capital markets. Interest in Panda bonds is taking off, after a number of foreign governments and strategically important borrowers have engaged mainland investors for the first time.
Many hurdles remain, however. While Panda bonds have captured global attention, there are still no formal regulations around the format. Potential issuers face an uncertain – and often lengthy – wait for approval, forcing any responsible corporate treasurer to look elsewhere for a stable source of funding.
The future of the offshore renminbi – or Dim Sum – market is also uncertain, as China opens up the domestic arena to international participants. But a rally in the currency this year has reignited investors’ interest, presenting some interesting arbitrage opportunities for the most nimble borrowers.
The debate around the role of international standards in China’s onshore market will continue for many years. International investors would like to see more global ratings, greater disclosure and more consistent pricing before they commit millions of dollars to onshore bonds – but they may not have a choice if international index providers include onshore renminbi securities in their global benchmarks.
On the other side of the equation, onshore market participants are far less concerned by individual credit events in the domestic Chinese market. While it is clear that the threat of default is rising, local and global investors have a very different perception of Chinese credit risk.
IFR gathered a panel of renminbi market specialists in Hong Kong in October to discuss the evolution of the renminbi bond markets. Panellists ranged from infrastructure providers to international investors with a newly established onshore investment vehicle, and the discussion presented key talking points around the role of international ratings, global investors and overseas issuers in China’s onshore renminbi market.
The panellists’ views differed on several points, but on one theme the consensus was clear: the internationalisation of China’s capital markets is irreversible. While there may be merit in different approaches, there is no doubt that international issuers and investors will have a far greater role to play in the years to come.
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