Gongfu bonds become bright spot with Asian investors as Chinese US$ bonds take off

AS GLOBAL investors continue to search for yield, China's dominance in Asia's bond market continues as its growing investor base and new issuances see no signs of abating. In 2017, the Asian G3 bond market experienced an exponential growth of 63 per cent to nearly US$400 billion, after eight years of compound annual growth rates of 35 per cent. China was no doubt a key contributor to this remarkable growth trajectory, accounting for 60 per cent (US$200 billion) of new volumes issued. Seven years ago, new issuance by Chinese players was just US$10 billion.

In the primary market, the dynamic between investors and issuers have also shifted, with the proportion of Chinese participants now accounting for 70-80 per cent of the market, compared to the dominance of European investors in years past.

The growth in issuance volume by China has outrun those of other Asian markets. Market specialists believe that the shift of market dominance to China away from South Korean and South-east Asian markets is likely to continue and is not reversible, given the steady economic growth of China's economy and the increasing offshore funding needs of Chinese corporates.

"Gongfu bonds" - which refers to Chinese US dollar bonds issued offshore - is a rising asset class that is gaining traction in the financial world. The new industry name, born out of a consultation with more than 400 market participants across Asia, is recognition of the robust potential of such bonds. In 2017, Chinese US dollar bonds doubled in issuance to US$214 billion, a testament to the growing appetite for Chinese credit exposure.

Greater onshore regulation, rising funding costs and new highs in China's debt capital market are driving the growth of gongfu bonds. Chinese corporations increasingly prefer to source funding, and fund their US dollar activities from the US dollar bond market - giving them exposure to a new investor base, including hedge funds or traditional mutual funds. For global investors looking to pick up yields, gongfu bonds are an appealing way of gaining exposure to the Chinese market while managing financial risks.

TICKING ALONG

High-tech gongfu bond sales - including Beijing-based Internet giant Baidu Inc's US$1.5 billion financing last month - have kept issuance ticking along despite signs of strain from surging US Treasury yields. Just this year alone, Chinese technology issuers including Tencent Holdings, Tsinghua Unigroup and Baidu have driven a 16 per cent jump in gongfu bond sales this year to US$46 billion. It is interesting to observe that for the first time, the technology and communications sectors are taking a significant share of the gongfu bond market, accounting for 22 per cent of issuance.

At the market level, China's fixed income market has been growing in size, and yields significant potential as the third largest bond market in the world. To capitalise on this potential, investors are looking for new tools that will allow them to better track, analyse and invest in gongfu bonds.

At a recent forum hosted by Bloomberg, market participants surveyed said that the greatest challenges in investing in Chinese US dollar credit are price transparency (30 per cent), lack of yield curves for valuation (24 per cent) and access to relevant news and research (22 per cent). When it comes to gongfu bonds, more than 60 per cent of respondents focus on both high yield and investment grades of the bond, suggesting demand from market participants for comprehensive data when assessing bonds.

Such market feedback has driven Bloomberg to develop the industry's first investment tools dedicated to the gongfu bond market, consisting of new benchmark yield curves, real-time news on China's debt market and the Bloomberg Barclays Emerging Market USD Aggregate China index, allowing investors to understand China US dollar bond analytics and broad market trends in China.

2018 will be another challenging yet exciting year for Chinese bonds. Increasing geopolitical risks will pose new uncertainties and drive volatility but market participants are showing caution and willingness to carry out more in-depth cost and risk analyses. With new tools and data enabling investors to track new market movements, technology will continue to play a key role in connecting the global financial community to China's bond market - both onshore and offshore.