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Treasury & Capital Markets
Financials aren’t the only factor in buying China G3 bonds, here’s what to look for
Buying a US dollar bond by a Chinese issuer is unlike buying a similar bond in the US. While the financial metric of the credit figures as among the factors to be considered, the issuer’s pedigree is just as important.
Monica Uttam 7 Mar 2017

Buying a US dollar bond by a Chinese issuer is unlike buying a similar bond in the US. While the financial metric of the credit figures as among the factors to be considered, the issuer’s pedigree is just as important.

A survey produced by Asset Benchmark Research on the buying behaviour of investors in G3 bonds issued by a Chinese issuer put almost identical weighting to both the sector the issuer falls under (79%) (i.e. state-owned enterprises (SOEs), privately-owned enterprises, local government financing vehicles (LGFVs), property and financial institutions), and the financial metric (77%).

As they become a dominant part of G3 primary issuances in this region, Chinese issuers are attracting more attention including from global investors. But these investors will need to first better understand the nature of the issuer and then tweak their investment approach accordingly.

Chinese issuers now account for anywhere from half to 60% of the annual value of G3 issuances of over US$200 billion. A big segment of Chinese issuers in the past year has been from LGFVs. Bloomberg data indicates that as a sector, LGFVs sold US$12.4 billion in US dollar bonds in 2016, three times more than in 2014. Dealogic data indicates LGFVs represent 13.5% of Chinese dollar issuances in 2016.

With no let-up in new-issue activity from Chinese issuers, which totaled US$30 billion year-to-date, the participation of Chinese investors also has increased and may have somewhat led to a distortion in the pricing of Chinese bonds including in the secondary market. “I have to admit the technicals are really important for the secondary market now,” says a fund manager in Hong Kong. While this is not a good trend, at least at this moment I don’t see any sentiment change. Chinese money is still buy, buy, buy anything they’re familiar with.”

Another portfolio manager agrees. “These days with the LGFV issuance, it’s hard to justify the company’s pricing based on the financials. So, the financials become irrelevant.” LGFVs tend to be appraised based on the economic fundamentals of the municipality as well as their linkage and support from the local government.

An IMF Working Paper released in October 2016 references the important role that central or local governments play for companies in China. They support SOEs as well as “private large strategically or socially important corporates” by giving them better access to financing and implicit guarantees.

The problem with onshore government support, however, is that it can be subjective. “There’s no way to say this is the company the province will support or not support,” points out a China-based fund manager. “It’s more of a play on the market preferences and the trend for the day. The last two to three months have been ok for LGFV. But some day it might turn and these could trade down aggressively.” says the Hong Kong-based asset manager of a large mainland-owned fund house.

Other factors tracked by ABR as considerations for asset managers when investing in China dollar bonds include relationship and guarantee arrangement with the parent (67%) and price (61%). Securing a credit rating was indicated by 53% of the respondents.

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.

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.

Additional reporting by Jacky Fung

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