As Chinese investors emerge to become a meaningful segment in the international bond market, both Chinese and global investment banks are rubbing their hands at the opportunity to generate greater business activity with them.

While some Chinese investors prefer to deal with Chinese banks and securities houses, or are indifferent as to who they deal with (choosing those who offer the best price), others see value in engaging with the international houses, especially as they grow their credit portfolio beyond Chinese issuers.

Asset Benchmark Research recently completed a survey on which international houses are favoured by Chinese investors. In the inaugural survey, Citi, Goldman Sachs and Bank of America Merrill Lynch top the ranking of international providers of secondary market trading in Asian G3 bonds.

A trader at a large state-owned bank based in Beijing said Citi stood out because their traders are “high quality”. Another trader at an urban commercial bank chose Bank of America Merrill Lynch for their competitive price and good insights on the macroeconomic trends in the market. “They have a good understanding of the supply and demand,” he says.

Data compiled by the Asian Development Bank shows that Chinese companies accounted for 57% of the US$87.2 billion of dollar bond issuance in Asia from January to September of last year. Chinese investors have also been accessing the dollar bond market in droves given the devaluation of the yuan and low yields on onshore bonds since August 2015.

Some Chinese investors, however, see no difference between international banks and their Chinese counterparts. “I do not really distinguish. Price talks. Whichever counterparty provides the better price, I will deal with them,” says one head of trading at a large commercial bank based in Shanghai. A Shanghai-based trader at an urban commercial bank also agrees: “…we do not distinguish the counterparties in that way, we will ask for pricing from all of the counterparties”.

A Hong Kong-based treasury head at the investment service flagship of a large state-owned bank took a broader view at the whole package the bank can offer. “It’s an overall consideration, pricing, availability of the bonds and liquidity is also important,” he says.

Given the recent capital controls in place by the government to curb outflows of cash leaving the country, the demand for US dollar bonds might be curtailed this year. “The technicals to support especially the Chinese dollar bond sector may weaken from here,” says Arthur Lau, co-head of emerging-market fixed income at PineBridge Investments in Hong Kong.

Lau anticipates more supply particularly on the high yield side. “The supply side probably will continue to pick up so, I expect more to come, especially the LGFV sector,” he says. With spreads widening, the ability of banks to differentiate themselves is becoming more crucial than ever.

Methodology

The Asian G3 Bond Benchmark Review, now in its sixteenth year was conducted in the third quarter of 2016. A total of 352 Asian G3 bond investors including asset managers, hedge funds, private banks, insurance funds and commercial banks from Hong Kong, Singapore, the rest of Asia, UK/Europe and the US took part.

The China bid refers to a subset of this group of Asian G3 bond investors from mainland institutions. A total of 67 investors have been segmented that are based in China and Hong Kong.

Data sets include market penetration, market share/wallet share, buying criteria/client satisfaction, research content and the top individuals. Follow-up interviews are conducted with a selection of respondents in each market to provide qualitative data. To learn more about the Asian G3 Bond Benchmark Review please click here.

Addtional reporting by Jacky Fung and Agnes Zhou