Chinese bond investors move offshore
Beijing’s monetary easing has sent onshore yields to multiyear lows, reports the Wall Street Journal.
China’s booming domestic debt market is pushing investors to seek higher yields offshore, just as its banks start to expand yuan lending world-wide.
The shift comes as China’s central bank is selling its first yuan bond in London Tuesday as part of its effort to bolster offshore yuan trading.
Beijing’s campaign to boost growth by easing lending conditions has sent yields for the onshore bond market to their lowest levels in years. At the same time, foreign investors jittery about China’s slowing growth are selling their offshore holdings at a record pace, pushing yields, which move inversely to prices, higher.
The difference in yields has lured Chinese investors to move more of their holdings to offshore debt, denominated both in yuan and US dollars. Until recently, bond yields in China typically have been higher than offshore rates.
“It’s not surprising the demand for these [offshore] bonds is skewed towards Chinese accounts,” said Tee Choon Hong, Standard Chartered’s head of capital markets in greater China and North East Asia. Foreign funds taking stock of their riskier assets after a volatile summer “would like to see how [these bonds] perform before jumping in again.”
On Tuesday, China’s central bank issued its first yuan-denominated bond in London, coinciding with President Xi Jinping’s first state visit to the UK. Because China’s uncertain growth outlook has kept foreign investors on the sidelines, most of the demand likely will come from Chinese lenders, fund managers say.
The People’s Bank of China is selling five billion yuan (US$787 million) in debt, with a one-year tenor and yield likely around 3.3 per cent. The bond aims to spur the development of the offshore yuan market by increasing “the supply of high quality bonds” and introducing “a better benchmark interest rate” for the market, according to the prospectus.
London is one of the top offshore yuan trading hubs in Europe, and the UK is wooing Chinese investors to finance projects in the country.
New issuances of offshore yuan-denominated bonds halved in the third quarter to US$4 billion from the same time last year, according to data provider Dealogic. The market started to quiet at the beginning of the year amid China’s weakening economic outlook, which was magnified by its surprise move to devalue its currency in August.
That month, foreign investors pulled US$1.78 billion from offshore yuan bond funds, the largest amount of such outflows on record, according to data compiled by fund-research firm Morningstar Inc. Most so-called dim-sum bonds are issued in Hong Kong, the biggest yuan trading center outside China.
While those outflows tapered to US$317 million in September, the results compare with inflows of roughly US$67 million in July. The heavy redemption in summer was mainly driven by Europe-based funds, investors say.
Meanwhile, around US$28 million worth of funds flowed into dim-sum bond funds in the first week of October, according to a local fund manager. The recent pickup in demand for offshore yuan debt mostly comes from Chinese investors, particularly banks repatriating funds from onshore to offshore markets, money managers and analysts say.
Five interest rate cuts since November and an influx of investors seeking safer assets after the summer’s stock market crash have driven a months long rally in China’s domestic bond market.
The benchmark 10-year Chinese government bond yield has fallen to a six-year low at 3.15 per cent, compared with 3.65 per cent at the end of last year. The same government bonds traded in the offshore yuan market now yield 3.52 per cent.
Two of China’s largest state-owned lenders, China Construction Bank Corp. and Agricultural Bank of China Ltd, issued a combined US$1.2 billion bonds—denominated in dollars and the yuan—in London last week, which largely were supported by Chinese investors, according to bankers and traders close to the matter.
When China Construction Bank Corp. sold a one billion yuan bond to global investors, only one per cent was taken up by European bond buyers. The vast majority went to Asia banks and funds, composed mostly of Chinese accounts.
The next day, Agricultural Bank of China Ltd. sold US$1 billion international bonds, with US dollar and yuan-denominated tranches. More than half of the debt was bought by the bank’s peer Chinese lenders’ offshore branches, according to a person familiar with the matter. That doesn’t include Chinese fund houses and securities firms, who bought much of the rest.
Chinese banks often buy 30 per cent to 40 per cent of issuances from fellow lenders, including those denominated in dollars, euros and yuan. Since June, when China’s stock market began to crash, such allocation has increased to more than 50 per cent.
“There’s an apparent political will for China to keep the CNH bond market going,” said Pierre Trecourt, Asia Pacific Head of Credit Sales at Société Générale in Hong Kong, referring to the offshore yuan debt market.
But a revival of China’s offshore yuan bond market still seems a distant prospect, with demand from companies and non-Chinese borrowers remaining tepid, analysts say.