Rallying Yuan and Declining US Investment Could Spell Trouble for Chinese-Issued Dollar Bonds
Yicai Global
/SOURCE : Yicai
Rallying Yuan and Declining US Investment Could Spell Trouble for Chinese-Issued Dollar Bonds

(Yicai Global) April 18 -- An inherent issue in funding sources is constraining the development of dollar-denominated bonds issued by Chinese firms.

Chinese borrowers have issued USD51.7 billion in dollar bonds so far this year to reach a record high. However, roughly half of them were bought by Chinese banks. American investors only bought 7 percent of the bonds, considerably lower than the 46 percent figure in 2014, Bloomberg reported today, citing statistics from UBS Wealth Management.

The market is harboring concerns about the dominance of Chinese investors, if they lose interest the market could take a big hit, especially considering that USD195 billion worth of Chinese corporate dollar bonds will mature in the next three years. Tightening regulation over wealth management products and a stronger yuan are the top concerns among investors right now, after targeting dollar-based assets during the yuan's three-year decline. The Asian currency's rally this year could quickly turn this around.

With so few foreign investors buying into the bonds, a shift in Chinese investors' attitudes could have a serious impact on the market. High interest from domestic investors has seen companies spending less money on promoting the bonds overseas and reducing the number offered in the US.

Raja Mukherji, head of Asian credit research at Pacific Investment Management Co.'s Hong Kong office, said he was closely monitoring factors that could dampen enthusiasm for Chinese corporate dollar bonds in the domestic market. The bonds are typically repackaged as wealth management products by Chinese banking institutions and then sold to investors looking for higher returns.

China's debts hit unprecedented levels after the global financial crisis began in 2008, and regulators are trying to keep liabilities in check by pushing liquidity on the money market. A significant rate hike may lower the appeal of dollar bonds to wealthy Chinese investors, and the government may impose further restrictions on the type of assets domestic investors can buy, Mukherji added, saying that these are some of the biggest risks at present.

Chinese investors are unlikely to lose interest in dollar bonds all at once, said Liao Qiang, an analyst at Standard & Poor's. But regulators have created hurdles in dollar funding channels. Risks mainly come from China's policies, which may cut off channels used to transfer funds from leading Chinese banks to speculative-grade issuers through non-banking financial organizations, he added.

Strict rules controlling Chinese dollar-bond investors make the market particularly susceptible to regulatory change, said Owen Gallimore, chief credit strategist at ANZ Singapore.

The large number of domestic investors makes Chinese dollar-bond issuers almost immune to external risk, but homogeneity among investors themselves is a market risk. The onshore 10-year bond yield has hit a one-year peak driven by the government's deleveraging efforts, while the Chinese bond market hit 12-year lows in the fourth quarter of last year.

If the onshore bond market's sluggish performance continues, regulators may be required to divert investment from overseas to the domestic market, Gallimore added.

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Keywords: Yuan , US Investement , Bonds