Managers take different routes to renminbi bond market

Would you like some Dim Sum? Europe’s fund managers reveal their secret recipes for playing China’s offshore local currency bond market.

A selection of funds investing in renminbi-denominated bonds have launched, or are being planned, in Europe. They are taking a range of approaches to China’s ‘Dim Sum’ market.

Managers including Allianz Global Investors, DWS Investments, ACM Bernstein and HSBC have funds ready or running, investing either wholly or partly in the nascent offshore RMB205bn (€23bn) bond market. They are launching at a time of strong appetite from long-term investors for all things Chinese, from equities to the younger fixed income market.

All managers point to China’s strong underlying economics – low debt-to-GDP ratio, currency reserves, high savings and trade balances. Such strengths should reflect in the growth of China’s so-called Dim Sum offshore bond market, they say.
It already expanded more than three-fold from RMB65 (€7.43) at the end of last year, and it now has more than 100 ­different issuers.

Popular choice

Some are local, tapping foreign i­nvestors with debt. Others are ­foreign companies active in China and issuing paper there to finance local expansion. Names include BP, Air Liquide, Tesco, Caterpillar and Bosch Siemens Hausgeräte. Managers will typically consider paper of both local and foreign issuers.

If Beijing wants to increase the importance of its currency, managers say, growing the Dim Sum market is a good start. They will harvest bond coupons from their holdings, of course – this could be a modest 2.5% to 3.5%. However, they also expect another contributor to returns – appreciation in the renminbi, or yuan.
It has added 23% in value against the US dollar since Beijing loosened the tie in 2005. Estimates on how cheap the renminbi is to the dollar vary between 12% and 50%.

Cecilia Chan, head of HSBC Global Asset Management’s $24bn Asian fixed income team and manager of the HSBC GIF RMB Fixed Income fund, expects appreciation.
“China has vast foreign currency reserves – the largest in the world by far – and an economy which is growing much more quickly than those in the Western world,” she says.

“The Chinese authorities have pursued a policy of managed ­appreciation of their currency since 2005, and there do not seem to be many compelling reasons to believe they will abandon that course of action any time soon.

“Domestic justification for an appreciating currency is provided by inflationary pressures and concerns about its effect on domestic demand, while international pressure from other countries and the obligations which come with membership of the World Trade Organisation also mean that a change of direction is unlikely. But investors should be fully aware that this is not a one-way bet.”

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