Chinese companies have long dominated Asian offshore issuance, and now the onshore bond market is attracting increasing attention from foreign investors and issuers.
Dim Sum bonds began the internationalisation of the renminbi markets, but they are by no means the only thing on the menu these days.
The addition of Chinese government bonds to international indices led to billions of dollars of inflows – with potential for much more –and means that global fund managers now have to pay attention to the onshore market.
China has loosened onshore quotas for international investors, and the launch of the hugely popular Bond Connect platform to link onshore and offshore trading systems has made it even easier for foreigners to access the world’s second biggest bond market.
This is allowing Chinese companies to diversify their investor bases, and foreign issuers to sell Panda bonds to take advantage of low funding costs in renminbi while matching their borrowings to their business needs in the mainland.
Until now, most international money managers have been content to take exposure to Chinese credit through the US dollar bond market, but that could be set to change.
In the offshore market, China is still the biggest issuer in Asia, but investors have had to take account of changes in the regulatory and legal environment.
The weaknesses of keepwell deeds, a common structure used by Chinese companies to provide a gesture of support to offshore subsidiaries when they cannot provide a direct guarantee, were exposed when a mainland court ruled that holders of Peking University Founder Group’s offshore keepwell bonds had no claim in its restructuring. Market participants expect the keepwell structure to continue to play a role, though it may only be used selectively by high-quality issuers, and offshore investors are now well aware of its limitations.
Meanwhile, authorities’ efforts to control potential debt imbalances mean that offshore quotas may be harder to obtain for some issuers, limiting the growth of the primary market and drawing attention to refinancing risk.
Defaults, though still extremely rare, are rising offshore and onshore as the market matures and the government tries to introduce market-led reforms, rather than supporting every issuer that runs into difficulties.
It has never been easier for international investors to take exposure to Chinese credit, but they need to do their homework before diving in.
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