Our reporters Hao Yajuan and Zhang Rongwang report from Shanghai and Beijing
According to the latest statistics of United Credit, the issuance of Chinese-funded US dollar bonds in the primary market rebounded significantly in November. In November, a total of 70 Chinese-funded US dollar bonds were issued, with a total scale of US$15.6 billion, a sharp increase of 348.39% month-on-month, and the issuance scale hit a new high since January 2022.
It is worth mentioning that the Fed's 2023 annual interest rate decision has come to an end. The Fed is widely expected to end its current rate hike cycle and pivot to rate cuts in 2024.
The analysis points out that benefiting from the significant decline in the yields of US bonds of various maturities, the reduction of US dollar financing costs, and the successful conversion of bonds by some leading real estate companies, which effectively boosted the issuance confidence of the Chinese-funded US dollar bond market, coupled with the incremental issuance of overseas institutions of Chinese banks, the issuance of Chinese US dollar bonds in the primary market has rebounded significantly. From an investor's perspective, Chinese dollar bonds have certain interest rate advantages, but they need to pay attention to exchange rate risks.
The issuance of Chinese dollar bonds picked up
Chinese-funded US dollar bonds are US dollar-denominated bonds issued by Chinese enterprises in overseas markets. When it comes to the reasons for the rebound in the issuance of Chinese-funded US dollar bonds, Zheng Qingyao, a fixed income trader of Metrobank (China) Co., Ltd., analyzed that from the perspective of supply and demand, since September, the market's expectations for the Federal Reserve to stop raising interest rates have become increasingly clear. At the same time, with the successive introduction of the mainland's package of debt policies to maintain the stability of the bond market, and the stabilization of the debt crisis of real estate enterprises led by Sunac, the market's confidence in the subject of Chinese-funded dollar bonds has also been boosted to a certain extent. The recovery of the issuance side caused by demand can be expected to continue for some time.
Bai Xue, an analyst at the Research and Development Department of Oriental Jincheng, believes that the recent rebound in the issuance of Chinese-funded US dollar bonds is mainly driven by the issuance of US dollar bonds of urban investment, and the driving factors behind it are the following two points. First, with the Fed's two consecutive pauses in interest rate hikes in November and December, the interest rate hike cycle has basically ended, and U.S. Treasury yields have fallen significantly from their highs. This means that due to the Fed's continuous interest rate hikes, the factors such as high financing costs of overseas US dollar bonds and suppressed demand for bond issuance have been substantially alleviated, coupled with the restrictions on new financing of domestic urban investment platforms, which has pushed up the demand for US dollar bonds issued by urban investment companies. Second, the rise in investment demand has promoted the recovery of issuance. In addition, since October this year, the issuance of more than one trillion special refinancing bonds and the implementation of the debt policy have alleviated the debt maturity pressure of some enterprises, and the short-term safety of urban investment bonds has been relatively raised, which has pushed up the market demand for overseas high-yield urban investment bonds and promoted the recovery of the issuance side.
The Fed's pause in interest rate hikes has also created a favorable market environment for Chinese dollar bond issuance. Yu Fenghui, a special researcher at a China financial think tank, pointed out that the Fed's pause in interest rate hikes indicates that its concerns about economic growth and inflation have eased, which will help boost market confidence and drive the demand for Chinese dollar bonds. At the same time, the market expects the interest rate environment to remain relatively loose in the future, which is conducive to bond issuance and investment.
Looking forward to the future trend of Chinese dollar bonds, Yu Fenghui believes that the Fed is unlikely to raise interest rates in the short term, but with the economic recovery and rising inflationary pressures, it is still possible to resume the process of raising interest rates in the future. The Chinese dollar bond market may be affected by rising interest rates during the Fed's interest rate hike cycle, but the prudent policies of the mainland government and enterprises in foreign debt management will help stabilize the market.
Zheng Qingyao analyzed to reporters that the predictions of the market's leading investment banks for the Fed's gradual interest rate cuts in 2024 are also different, among which the more aggressive predictions believe that the interest rate cut will start in March next year, and the magnitude may be as high as 275 basis points. Under such market sentiment and expectations, Chinese dollar bonds will have a good chance to maintain a positive trend in the future. To sum up, the issuance and investment of Chinese dollar bonds is indeed an opportunity for the market next year. However, since the issuance and investment of Chinese US dollar bonds involves exchange rate exposure, it is also one of the very important risk control points to pay attention to exchange rate changes and exchange rate-related policies in the process of actual business operation.
"From the issuer's point of view, the issuance of Chinese dollar bonds needs to pay attention to the reasonable choice of maturity and window timing. From the investor's point of view, it is necessary to reasonably choose cost-effective US dollar bonds according to their own debt maturity and structural issues, and considering that the maturity of Chinese-funded US dollar bonds is generally about 3 years, special attention should be paid to the changes in the issuer's qualifications and credit risk, pay attention to the limited sinking, and also pay attention to the liquidity risk of the bonds. Specifically, in terms of urban investment bonds, with the strengthening of the expected implementation of the 'package of bonds', the credit risk of urban investment platforms in weakly qualified regions is expected to be reduced, and appropriate attention can be paid to relevant credit mining opportunities and moderate sinking of short duration. In terms of real estate bonds, the current sales demand is still weak as a whole, and overseas credit rating agencies have downgraded the ratings of leading real estate companies, resulting in sharp fluctuations in bond prices of some leading real estate companies under the influence of pessimism. Bai Xue said.
Pay attention to exchange rate and liquidity risks
From an investor's perspective, what are the opportunities and challenges for investing in Chinese dollar bonds?
Wells Fargo Fund pointed out that investing in Chinese dollar bonds needs to pay attention to three aspects. First of all, the yield of U.S. Treasury bonds and the liquidity of the U.S. dollar are mostly related to the Fed's monetary policy, and once the Fed turns from tight to loose, it will open the channel and space for the downward movement of Chinese dollar bond interest rates, which will bring about an increase in bond prices.
Second, the main body of Chinese-funded US dollar bonds is domestic enterprises, and the credit qualifications of enterprises are closely related to the domestic economic status and regulatory environment. When the domestic economic situation is improving and the regulatory policy tone is warm, it is conducive to the compression of credit spreads of Chinese dollar bonds, thereby driving up bond prices.
Finally, when domestic investors participate in US dollar bond investment, the exchange rate will involve currency conversion. Generally speaking, the depreciation of the RMB exchange rate will contribute to a certain amount of income, and vice versa, it will produce a certain amount of income erosion. In actual investment, certain tools can be used to lock foreign exchange and hedge the fluctuations caused by exchange rates.
Yu Fenghui pointed out that from the perspective of investors, compared with other investment products, Chinese dollar bonds have certain interest rate advantages. Investing in Chinese dollar bonds can diversify your portfolio and reduce risk in the single market.
However, it should also be noted that the credit risk of Chinese dollar bonds is relatively high, and investors need to have strong risk identification and control capabilities. Exchange rate fluctuations may lead to fluctuations in investment income, and investors need to pay attention to exchange rate movements. Compared with other bond products, the liquidity of Chinese dollar bonds is relatively low, and investors need to fully consider their liquidity needs before investing.
In this regard, Yu Fenghui suggested that investors can diversify their investments into Chinese dollar bonds of different industries, enterprises and maturities to reduce the risk of a single investment. Invest in corporate bonds with high credit ratings to reduce credit risk. Pay attention to the market dynamics on a regular basis, adjust your portfolio according to the market environment, and ensure investment returns. Pay attention to changes in relevant policies and regulations at home and abroad to ensure investment compliance.
(Editor: Zhu Ziyun Proofreader: Yan Jingning)