By Gregory Suen
The offshore renminbi (RMB) bond market once again demonstrated its resilience in January, following a year when it was one of the best performing emerging fixed income markets in 2013, despite recent market jitters.
The offshore RMB bond market trimmed gains made earlier in the month in the second half of January when lower-than-expected manufacturing PMI data and concerns over trust loans in China as well as pressure from less-stable emerging market countries such as Turkey, Argentina and the Ukraine sparked a correction which spilled over into developed markets.
Yet, the market ended the month higher and outperformed many other debt asset classes. The HSBC Offshore RMB Bond index in USD terms returned 0.62%, whereas the JPM EMBI Global Total Return index and the Barclays Global High Yield Total Return index returned -0.77% and 0.02% respectively. This once again showcased the resilience of offshore RMB bond market.
While asset markets are likely to remain volatile on global and emerging market (EM) concerns, the impact on the offshore RMB bond market could be relatively small given the evidence of its resilience and its seemingly unique characteristics.
We think it’s too early to conclude that China’s economy is slowing down materially simply based on a single PMI data release. More importantly, much of the growth and economic development is still well managed by the Chinese government and it has the firepower to boost the economy whenever necessary.
Although market volatility associated with Chinese policymakers’ attempts to wean the economy off dependence on credit growth could continue for some time, the reform plan unveiled after the Third Plenum should help support long-term growth at a sustainable momentum. Moreover, the Chinese government does not want to see overheating in the economy, so some slowdown should be acceptable as long as it is still within its target range. There still appears to be a fair balance between growth and price stability even though inflation is likely to trend higher.
We expect that there will be more noise coming through around these trust loan products as more will mature this year and there may be some defaults eventually. However, this is still a managed process by the government as it has bailed out some of the troubled companies over the past couple of years.
The government is also managing market expectations by reminding investors that these products are not guaranteed. So, eventually, when the first default takes place it should come as less of a shock.
We have seen quite a number of issuers tapping the offshore RMB bond market in the first month of 2014. Some of them are existing issuers coming back to refinance debt issued a few years ago. We also see some new names coming to the market, especially some Chinese government-related entities and Russian banks. Therefore, the range of issuers is fairly diversified and this should help improve the liquidity of the secondary market.
Part of the reason for the market’s resilience can be explained by the simple bond fundamentals of relatively high credit quality and duration adjusted yield. Also, the offshore RMB market does not map the Chinese economy closely and therefore is less exposed to worries of a slowdown in emerging markets.
It is also a relatively new asset class. Most investors are still at the stage of adding their exposure, so the fund flow dynamic has been also favourable. These metrics are broadly the same for 2014 as they were at the beginning of 2013. This suggests that the prospects for this market remain good. Although returns are unlikely to be spectacular and volatility is likely to stay for some time, there is a good chance that the market will once again be stable and resilient.
The attractive fundamentals of the offshore market make it an interesting peripheral option within a broader portfolio for the more discerning investor at the moment, but over time it is likely to make up an important building block for both institutional and individual investors’ portfolios everywhere.
Gregory Suen is fund manager of HSBC RMB Bond and HSBC GIF – RMB Fixed Income
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