With supply unable to keep up with demand and the prospect of currency appreciation of as much as 5% a year, why would anyone want to sell dim sum bonds?
Speaking at the launch of a new tradable offshore yuan bond index in Hong Kong on Monday, Vishal Goenka, the bank’s head of local currency credit in Asia, said liquidity was thin initially but secondary trading volume in offshore yuan (CNH) bonds exploded to about three billion yuan ($464 million) in May. That’s some 15 to 20 times the amount traded in January, with clients putting in orders for as much as 100 million yuan per ticket, he added. Deutsche’s new index aims to further boost liquidity in the secondary market by allowing global investors to passively invest in the asset class in U.S. dollars.
en a boost to secondary trading. CNH bond issuance in the first half of 2011 was up 89% from the year before at 83 billion yuan, according to Deutsche Bank figures. As the WSJ reports, the high-yield space has been particularly robust. Businesses with no credit rating, or ratings below investment grade, accounted for about 14% of the 138 billion yuan in total outstanding dim sum debt, according to HSBC Holdings PLC estimates. (Recall that the CNH bond market didn’t have its first high-yield issuance until December last year.) With more supply in the market, there’s more incentive to sell.
While increased selling activity in CNH bonds certainly marks a healthy development for secondary-market liquidity, it also reflects what’s on almost every investor’s mind right now─Chinese credit risk. Mr. Goenka said Chinese forestry company Sino-Forest Corp., whose problems have thrust Chinese corporate governance firmly into the spotlight, is the “main reason” for the decline in secondary-trading volumes in dim sum bonds since May’s peak, depressing bond prices. Deutsche’s own head of global risk syndicate for Asia, Herman van den Wall Bake, told Dow Jones Newswires earlier this year that credit risk was a real worry in the CNH market:
One corporate bond trader said that investors also want to reduce their CNH risk and sell because of growing worries over China’s local-debt problem, not to mention the volatile global macroeconomic environment.
Interesting case how market differs on info and perception when dealing with unfamiliar market, such as US on China! People overreact to news reports and generalize isolated cases to big pictures.