* Growing onshore pipeline raises doubts for international yuan bond market
By Frances Yoon and Daniel Stanton
HONG KONG/SINGAPORE, Nov 16 (IFR) - Frenzied interest in China's revamped Panda bond market is raising questions over the future of Dim Sum debt, as foreign issuers study the tempting prospect of issuing onshore renminbi debt at historically low yields.
The first public offerings of Panda bonds from foreign commercial banks kicked off in late September, and bankers say they have already seen strong interest from foreign governments, banks and companies looking to issue such paper because of the pricing advantages available.
One-year onshore government bond yields dipped below the offshore renminbi equivalent for the first time in February, and Dim Sum issuance has fallen drastically in the past few months as more Chinese companies have prefered to borrow onshore. Issuance in 2014 reached 337.8 billion yuan ($53 billion), but the total year to date stands at just 150.8 billion yuan, according to Thomson Reuters data.
As China opens its domestic markets and relaxes capital controls, foreign issuers are gaining access to the cheaper Panda market, the name given to foreign issues in China's domestic bond market. After deals from the Hong Kong units of HSBC, Bank of China and China Merchants Group, a number of foreign issuers are now considering the format.
Panda bonds give issuers access to Chinese yields, which hit historically low levels after six interest rate cuts in the past year and increased demand for fixed income in China.
The Republic of Korea is in talks to sell a 3 billion yuan Panda bond and DBS is also mooted as a potential issuer, bankers say.
"This will probably be the last year with a decent Dim Sum market," said a DCM banker at a Chinese bank in Hong Kong. "High-yield Dim Sum dried up this year, and now only banks are issuing. Eventually, it will squeeze out Hong Kong." Survival of fittest Nevertheless, not all market participants are ready to declare Dim Sum bonds irrelevant. Global demand for renminbi assets will increase, especially as the International Monetary Fund prepares to include the Chinese currency in the basket of currencies behind its Special Drawing Rights.
If this happens, Dim Sum bonds could continue to find buyers even if China opens its onshore market further, and may even be more attractive than Pandas if offshore yields remain higher.
"I don't think the Dim Sum market will disappear," said Jeffrey Qi, portfolio manager at E Fund Management (HK), the Hong Kong arm of the Guangzhou-based asset manager.
"I think the offshore renminbi bond market will be growing after the short-term negative sentiment on renminbi, and could double in the next few years. China needs to build an offshore asset pool to encourage investors to hold renminbi as part of its goal to internationalise the currency and be part of the SDR, and, to do that, you need to build the offshore fixed-income market."
From an execution standpoint, the fact that Dim Sum issuance remains easier and more aligned with international standards is also hard for issuers to ignore. For instance, it is possible to issue Dim Sum bonds off a global MTN programme, while Pandas require extensive Chinese language documentation and a local credit rating.
"The offshore market is still important because they are more familiar with the governing laws, and fund flows are a lot easier to manage, but I do see more competition because the onshore market has rallied so much," said Gregory Suen, investment director at HSBC Global Asset Management. Suen manages the HSBC RMB Bond Fund.
Eventually, the barriers between the two markets are likely to blur as China continues to liberalise its capital markets and the investor base grows for Panda bonds. China has already made significant steps this year to allow foreign central banks, sovereign wealth funds and international financial institutions to access the interbank bond market.
"We expect CNH to be 5-8 percent of the global bond market in five years' time," said the Asia head of syndicate at a European bank. "It will be three to four years before the Panda market becomes a day-to-day active market. The two markets will continue to grow, not to the detriment to each other, and will eventually become fungible."
In the meantime, the convergence of the two markets can grow as more global indices include onshore renminbi bonds to facilitate direct valuation comparisons between the two.
"Yields in Dim Sum and onshore bonds will converge in the long run, but probably not to zero because it will take some time for China to allow free trade," said Qi. "Onshore investors still need to go through extra layers to buy offshore, too."
Hong Kong bankers are hoping that the special administrative region will remain relevant, even if China finally accelerates market reforms in its Shanghai Pilot Free Trade Zone.
"China can have two or three meaningful financial centres," said a senior executive at an Asian bank. "Shanghai will be big, but Hong Kong can also be significant." (Reporting By Frances Yoon and Daniel Stanton; editing by Steve Garton)