Article / 15 February 2017 at 11:30 GMT

Weekly Bond Update: China issues licences to US banks

Fixed Income trader / Saxo Bank
  • China's bond market has become world's third largest, behind Japan and US
  • Chinese authorities are now opening domestic market further
  • Last week it issued market licences to two US banks: JP Morgan and Citigroup 
  • Beijing hopes the move will further boost the so-called panda bond market 

By Michael Boye

While the opening of the Chinese economy to the rest of the world and gradual embracing of market economy by the Communist superpower has been one of the most dominant and driving themes in finance this millennium, the development has been kept on a very tight leash by the still all-deciding central government in Beijing.

The Chinese bond market is no exception, slowly growing to become the world's third-biggest behind only Japan and the US. So far, it has mainly been a closed party for the domestic banks operating in China's inter-bank market, where about 90% of securities are issued and traded. Non-Chinese issuers with an intention to sell renminbi denominated bonds have been referred to the offshore so-called dim sum market in Hong Kong. 

The onshore Chinese bond market could soon be the world's second biggest
Source: Bank of International settlements 

Now the Chinese authorities are opening the domestic market further, as last week it issued market licences for the first time to US banks –  JP Morgan and Citigroup the lucky winners – after having opened the market for the first time to foreign operators earlier last year.

The move, however well-intentioned and progressive it might seem on the outside, won't revolutionise China's bond markets overnight though, as state-controlled interests and long-held relationships still dominate decision-making at the corporate level. 

Instead, by letting foreign banks into its local market, Beijing hopes to further boost the so-called panda bond market (and they say bankers have no creative sense) – that is improving access for non-Chinese issuers to sell bonds in China's domestic market.

Up until now it has been a slow start for this very young market, where two issues from the Republic of Korea and Province of British Columbia respectively stood out as the lone notable breakthroughs. The process of obtaining the necessary approvals, a rigid process of disclosures and documentation with local authorities, has been blamed for halting the progress. 

However, towards the end of 2016, the market finally seemed to get going with new issues from German car manufacturer Daimler, French utilities provider Veolia as well as the government of Poland. With the addition of US book runners, the road to future growth could very well go through corporate America.

Yield on China's single USD bond maturing in 2027

Source: Bloomberg. 
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For most bond investors though, the easiest way to gain exposure to Chinese companies is still in the offshore and rather liquid international bond market. Huarong Finance, the government controlled asset manager, recently received $8 billion worth of interest for its new issues: a $1 billion three-year USD bond priced at 3.375% and another $1.5 billion perpetual bond with a five-year call priced at 4.7%. 

Also the government-owned Bank of China, which is among the world's largest lenders and a frequent USD bond issuer, issued new bonds this month, when it sold new five-year USD bonds at roughly 3% interest. The government itself, even, launched its inaugural international bond back in 1997, when it issued a then 30-year bond at 7.5% (ironically with JP Morgan acting as lead manager). With 10 years left on the bond, it currently trades with a 3.4% yield to maturity.

So while liberalisation of China's bond markets (and capital markets in the country in general) has been underway for a long time, and it remains years away from being set completely free, there are very real and firm steps being taken in that direction.

Come on in ...  by allowing foreign banks to enter its local market, Beijing hopes to further boost its so-called panda bond market. Photo: Shutterstock

– Edited by Gayle Bryant

Michael Boye is a fixed income trader at Saxo Bank


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