It is a lot harder for David Yim (嚴守敬) to rack up the airline miles these days. The bond underwriter at Standard Chartered PLC used to fly across the Pacific from Hong Kong to the US four or five times a year to arrange dollar-debt deals, but he is not sure he will make it even once this year.
Such is the gravitational pull China is having on the market for dollar bonds issued by Asian companies and banks.
Borrowers used to tap US-based investors when they sold dollar securities. Now, there is a big enough pool of greenbacks in Asia and predominantly Chinese buyers are able to take up the vast majority of bonds sold in dollars.
Within three years, this market could reach US$1 trillion, composed mostly of Chinese dollar bonds, according to projections from Australia & New Zealand Banking Group Ltd.
Big Chinese demand could be changing the risk dynamics of the dollar bond market in Asia, market watchers say.
“Having a Chinese buyer means there’s a different risk profile — it’s not like Western money managers investing in Thailand before the Asian crisis,” said Nigel Pridmore, a long-time capital-markets attorney and partner in Hong Kong at law firm Ashurst.
Evidence of the effects of the change was on display this month, when financial markets around the world were roiled by escalating tensions between the US and North Korea.
Among the harder hit markets was US high yield — also known as junk-rated — dollar bonds, but premiums on junk-rated Asian dollar bonds by comparison barely moved.
“We’ve witnessed Asia’s offshore bond markets become the less-volatile part of global credit on this firmer local demand,” said Owen Gallimore, head of credit strategy at ANZ in Singapore.
That, in turn, is pulling some global asset managers into the market, he said.
However, with locals dominant, there is a welter of new dangers to consider, starting with Chinese financial regulations.
China’s move to contain leverage in its domestic financial system has made it more expensive to sell debt onshore, something that has helped fuel the boom in Chinese dollar-bond issuance.
Private-sector property developers that might find it tough to get loans from state-owned banks have been among the biggest sellers.
These dynamics can shift abruptly if Chinese regulators change policy, and this summer’s surprise crackdown on big private conglomerates’ overseas acquisitions is just one example of how quickly the picture can change.
Any move by officials to rein in Chinese funds’ purchases of dollar debt — or companies’ and banks’ ability to sell it — could have a dramatic effect.
“The weakness to the ‘China bid’ is its homogeneous nature and strong, but unpredictable regulatory oversight,” Gallimore said. “We have intra-Asia capital flight risks now rather than US and European capital flight risks.”
As the market expands, it one day could pose contagion risks to assets outside the region, much the way a surge in European bond yields can have global effects.
For now, foreign concerns center on a less-disciplined approach toward best practices.
Market participants from non-Asian institutions sometimes complain privately about “crowding out” from Chinese buyers, who have in some cases brought looser standards from the onshore bond market.
In China, nearly two-fifths of corporate debt is improbably graded “AAA” by domestic ratings companies and bond desks lack the kind of extensive back offices to check deals or research teams to do due diligence that are found at fixed-income operations in developed nations. A record number of debut dollar bond deals by lesser-known issuers makes it tough for analysts to keep up.
The surging Asian issuance is a new chapter for the offshore dollar-bond market, which was created by the Europeans more than half a century ago. Spurred by the desire to tap a broad, international pool of capital, the manager of Italy’s highways sold the first so-called Eurobond in 1963.
It also reflects a long-held aim of Asian policymakers to encourage money to stay within the region ever since the 1997-1998 financial crisis that saw economies and corporate empires collapse after excess borrowing in dollars when local exchange rates were overvalued.
Nations across the region have made great efforts to build local-currency bond markets. Encouraging retention of dollars in Asia — much of which come from trade surpluses — is another aspect of their approach.
Here are some of the changing contours of the Asian dollar-bond market, and its outlook, according to ANZ:
Issuance in the first half of this year reached a record US$155 billion. Investment-grade debt made up 62 percent of the total, with 23 percent being high-yield and 16 percent non-rated. Nearly all the debt was corporate and financial, with sovereigns making up just 6 percent.
China made up 66 percent of total issuance, with corporate debt 38 percent of the total. About 79 percent of the total was bought by Asian buyers. Chinese buyers take up about 65 percent of the debt sold by Chinese issuers. About 26 percent of Chinese issuance was property, with financial firms making up 42 percent.
Bonds sold according to Securities Act Rule 144A, which is required for issuance in the US, have tumbled to 16 percent of issuance, from 37 percent just three years ago. Bonds sold outside the US are known as Regulation S, or Reg-S, securities, and are subject to much laxer accounting guidelines.
China made up about 47 percent of the US$730 billion market outstanding as of June and is projected to surpass 60 percent of the market by 2020, when the total is forecast to reach US$1 trillion.
For Yim, the head of debt capital markets at Standard Chartered for greater China, the market’s change has meant spending more time in his home base Hong Kong, not just because of less business travel.
Years ago, August was a quiet month, when Asian bankers could go on Western-style summer holidays. Nowadays, issuance continues apace through the month. It is Chinese New Year that has become the dead-zone for sales.
“Back in 2010, 2011 if you wanted to sell even US$200 million to US$300 million for say a [People’s Republic of China] property issuer, you had to go to the US,” Yim said in an interview last month. “Now you can do Reg-S issues at US$2 billion and there’s not much difference in pricing.”
China Evergrande Group, a junk-rated company that is China’s biggest developer, set a new bar for the size of deals that can be done in Asia with a US$6.6 billion Reg-S sale in June.
However, the ultimate test of resilience to an outside shock might still be looming, as the Federal Reserve keeps up its campaign of normalizing monetary policy.
Robert McCauley, an adviser to the Bank for International Settlements with decades of experience analyzing global debt markets, said that “it was the stock of dollar bonds issued by non-financial borrowers outside the United States that proved most responsive” to policymakers’ drive to reduce longer-term borrowing costs.
Over the longer haul, events outside Asia are to prove less important, observers in the region say.
“Asian capital markets, with China at the center of it, are going to be transformational,” and the dollar-bond market is part of that, said Luke Spajic, head of portfolio management for emerging Asia at Pacific Investment Management Co in Singapore.
There are “so many more companies that need to come to market in Asia” for dollar bonds, Spajic said in an interview while on a visit to Beijing. “Asia has a big savings pool — this is their natural stomping ground. There is enough demand in this region to scoop up all the securities.”
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