China’s onshore ABS (asset-backed securities) market has been growing rapidly since the launch of Bond Connect, according to panellists at IMN’s Asian Structured Credit Summit on Wednesday (24 October).
The country first began opening up to foreign investors in 2003 with the launch of the QFII (Qualified Foreign Institutional Investor) scheme, though the panellists said it generated little interest at the outset.
Then in 2011, the launch of the RQFII (Renminbi Qualified Foreign Institutional Investor) programme – the ‘renminbi sister of the QFII programme’ – generated greater investor interest, with quotas distributed across 15 countries.
More recently, following the launch of Stock Connect in 2014 and Bond Connect last year, as well as announcements from index providers regarding the inclusion of Chinese onshore assets in global indices, more attention from international investors is now being focused on China.
In particular, the panellists agreed, the onshore ABS is growing rapidly through Bond Connect, which has been catalysed by the planned inclusion of Chinese onshore assets in global indices starting from April 2019, as well as by recent reforms introducing DvP (delivery-versus-payment) settlement, block trading and a tax exemption for foreign investors.
According to HKEX (Hong Kong Exchanges and Clearing) head of fixed income and currency product development Julien Martin, Bond Connect is now trading over RMB 4 billion (USD 576 million) daily as of Q3 2018, representing 70 percent year-on-year growth, with participation from 452 investors from 21 countries.
Of the approximately 450 trades earmarked within the CIMB (China Interbank Bond Market) for access to Bond Connect, 112 are for ABS and RMBS (residential mortgage-backed securities), representing a total invested amount RMB 270 billion, said Martin.
Most international investors have kept their focus on auto ABS, or ABS issued by the subsidiaries or joint ventures of international automakers, whose issuances are often rated by one of the top three international ratings agencies. International investors participated in an onshore RMBS deal for the first time in April.
According to HSBC head of structured capital markets Kyson Ho, the opportunity for international investors in ABS is evident from the size of the market (USD 230 billion in new issuances last year), larger ABS deal sizes and increased issuance frequency.
Despite this growth, international investors still have questions about the market’s depth, how it can be accessed, their ability to hedge RMB and interest rate exposures, and the availability of secondary liquidity to meet investor redemptions, according to Standard Chartered executive director, credit trading, Ankit Garg.
Mayer Brown partner Jason Kravitt said that investors just want to make sure they have recourse, which usually involves enforcement or collateral. The challenge for China, he said, is that it has not yet convinced the world it is a nation of laws. According to Kravitt, international investors will be more willing to invest in China after they’ve seen a credit cycle (involving some asset distress) test its legal and enforcement frameworks.
HSBC’s Ho said that while Bond Connect has made a huge difference to enable market access for international investors, it only provides access to the CIBM and should be extended to the ABS exchange market.
According to Martin, HKEX is currently working on something along these lines, potentially to extend Stock Connect to include listed ABS. But, he said, it is also reasonable to expect more ABS listings on the CIBM for Bond Connect given the greater access for international investors.