Chinese issuers are increasingly targeting global investors for domestic bond offerings, as they look to take advantage of growing demand for onshore renminbi securities to broaden their investor relationships. State-owned Central Huijin Investment last week tapped the Bond Connect link for the first time to raise Rmb15bn (US$2.39bn).
In the past two weeks, Industrial Bank and Bank of Communications gave offshore investors a taste of the country's booming securitisation sector with the first Bond Connect offerings backed by residential mortgages and credit card installments, respectively. However, offshore investors' responses to the three deals were polarised. Central Huijin is said to have allocated about 20% of the jumbo offering to overseas buyers, including foreign banks and Asian sovereign wealth funds.
Meanwhile, the two Chinese banks sold just a few million renminbi offshore, according to people familiar with the matter - a marginal portion of their respective issue sizes of Rmb8bn for Industrial Bank and Rmb16.59bn for Bocom. Market participants said some Chinese issuers have been looking to tap offshore investors as domestic appetite waned on supply concerns, but warned their offshore voyage would not be easy.
The response to last week's deals showed that international investors still favoured government-linked Chinese bonds as a play on interest rates rather than credit investments, they said, noting that Central Huijin's quasi-sovereign status was key to the deal's success. Bloomberg Barclays is preparing to add onshore government and policy bank bonds to its Global Aggregate index, which is tracked by about US$2trn of assets, from April 2019.
For Chinese ABS, however, much needs to be done to align those transactions with international standards, and getting international ratings is the first step. None of the three offerings carried an international rating.
Central Huijin, with a domestic AAA rating from China Chengxin, has been on a debt binge since November, when it issued rated notes for the first time in the interbank bond market. Prior to that, Central Huijin issued only so-called government-supported agency bonds, which have a zero risk-weighting from the People's Bank of China and are exempt from credit ratings.
With the latest issue, Central Huijin has raised a total of Rmb45bn from bonds this year to date. Market sources said Central Huijin sought primarily to diversify its investor base through the Bond Connect deal. "Central Huijin is more concerned about having a diverse investor base, particularly those hold-for-trading type of offshore investors, and about creating a more liquid secondary market for its notes," said a source familiar with the deal. The majority of China's onshore financial institutions hold bonds to maturity.
Books closed for Central Huijin's offering last Monday before the China's central bank announced a surprising move to cut the reserve requirement ratio for banks at around 6:30pm.
A Rmb3bn two-year piece priced at par to yield 4.50% in China's interbank bond market and a Rmb12bn three-year portion at par to yield 4.58%. The prices represent spreads of about 30bp over China Development Bank's liquid curve.
Bank of China was lead underwriter on Central Huijin's issue, with China Everbright Bank as joint lead underwriter. There were 40 other Chinese domestic banks, securities firms and an insurance firm among the syndicate members.
In the securitisation segment, international carmakers' auto financing units in China have been pioneers in exploiting the Bond Connect route to sell auto-loan ABS. The first such deal was launched in August 2017 from Ford Automotive Finance (China).
Auto-loan ABS transactions that have adopted global standards and have international ratings have seen offshore investors' allocations grow to about 10%, according to a banker with a foreign bank who arranged several such deals.
But other asset classes of China ABS are likely to face an uphill battle to win over international investors, most of which were conservative about China ABS, market participants pointed out.
"China's onshore market is drawing more and more attention from global investors, but to spark real interest, it is very important to get international ratings," said the banker with a foreign bank. Some have started to take this initial step. Nasdaq-listed Chinese online retailer JD.com conducted a non-deal roadshow in Hong Kong and Singapore last month ahead of a proposed offering of small-loan backed ABS via Bond Connect, according to market sources.
The transaction had scored provisional ratings from Fitch, sources said. Another Beijing-based banker with a Chinese securities house observed that offshore interest for China RMBS and consumer loan ABS by Chinese fintech companies remained scarce.
"Most of the international investors are not yet comfortable to look beyond auto-loan ABS in China," he said. He said some international high-yield funds initially were very interested in Chinese securities backed by non-performing loans, but did not buy those securities as yields were much lower than those funds had expected.
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