Onshore renminbi bonds are poised to become the next big thing in the global capital markets, as international investors brace for index inclusion and issuers embrace the Panda bond market as an alternative source of funding. While China has rolled out the red carpet, however, international participants appear to be holding back.
Changes to Chinese regulations, including enhancements to the Bond Connect trading link and the publication of long-awaited Panda bond guidelines, have opened up new opportunities for global market participants. But the road ahead is far from smooth, with uncertainty lingering around the state of China’s economy and a worsening trade dispute with the US.
IFR Asia’s latest Renminbi Bond Markets Roundtable brought together a panel of sell-side, buy-side and credit analysis specialists to discuss recent developments and the outlook for Chinese bonds – both onshore and offshore.
Since IFR last hosted this discussion 12 months ago, major index providers have confirmed plans to add onshore renminbi bonds to their respective benchmarks, China has introduced delivery versus payment to the Bond Connect link and the central bank has clarified procedures for potential foreign issuers. Global rating agencies have also won approval to operate in the onshore market.
Despite the rule changes, international issuers and investors are still cautious. A weaker currency and rising credit risk are reducing appetite for renminbi assets, and some technical issues remain unresolved.
Panellists discussed the impact of recent changes and the need for further enhancements, such as standardised repo agreements and other market conventions, but were in no doubt that the renminbi market is now far more accessible than ever before. The hurdles, then, are around China’s fundamental appeal and relative value, rather than regulatory restrictions and capital controls.
Investors are wary of further depreciation in the renminbi as the US dollar continues to strengthen, and do not yet trust the onshore Chinese market to price credit risk appropriately. With default rates rising as China deleverages, that suggests it will be some time before China’s private-sector issuers benefit from growing global inflows. But it is also an essential first step.
The arrival of more overseas investors – even passive index trackers – will bring with it enhanced credit research capabilities, courtesy of global rating agencies and buy-side analysts. As those capabilities deepen and onshore markets price in real recovery rates, global participation can only grow.
Now that Chinese authorities have cleared the path, the remaining hurdles look merely temporary.
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