Despite a weak third quarter issuance of dim sum bonds, a type of bonds issued outside of China but denominated in Chinese RMB, Fitch Ratings still expects another record breaking year in 2014, says a research report issued by the rating agency.
Total dim sum bond issuance in U.S. dollar terms fell by 65% to US$4.1 billion in the third quarter, down from second quarter’s record level of US$11.7 billion.
Dim sum bond issuance fell sharply in the third quarter for both local Chinese and multinational names, and across the three main categories of financial institutions, sovereigns, and corporates.
Financial institutions continued to account for the lion’s share of dim sum bonds issuance, with US$2.9 billion, or 70%, of third quarter’s total issuance. However, their issuance fell 50% from the second quarter’s US$5.8 billion.
Issuance by sovereigns fell to US$0.7 billion from US$3.1 billion, and issuance by corporates declined to US$0.5 billion from US$2.7 billion.
Aside from dim sum bonds, the cross-border issuance market for international Chinese corporates also underwent a seasonal slowdown in the third quarter, with issuance falling to US$6.4 billion from a record US$38 billion in the second quarter.
In fact, cross-border issuance by corporates for the whole of Asia-Pacific fell to US$34 billion in the third quarter from a record high of US$75 billion in the second quarter, though it remained above the US$25 billion issued a year earlier.
Issuance levels in Asia-Pacific during the first and third quarters are typically lower due to seasonal factors, including holidays. Therefore, Fitch expects bond issuance by corporates in Asia-Pacific, including dim sum bonds, to bounce back in the fourth quarter.
But so far in 2014, dim sum issuance of US$27.1 billion during the first three quarters has already exceeded 2013’s full-year tally of US$20 billion, says the report.
Notably, in fourth quarter 2014, dim sum bonds issuance stood at US$7.1 billion, accounting for a disproportionally high 35% of the year’s total issuance amount.
Assuming the same pattern, total issuance of 2014 could be around US$42.0 billion, more than double that of 2013.
The key risks to such an assumption include interest rate and liquidity levels, both within the dim sum bond market and in comparison with the onshore RMB market and offshore U.S. dollar market.
Fitch expects the dim sum bond market to continue growing at a steady pace, driven by the Chinese government’s efforts to internationalize the RMB.
In addition, increasing willingness by exporters to China to accept RMB-denominated payments and a rising number of global financial centers offering RMB clearing and settlement infrastructure will also drive its growth.
The dim sum market’s growth potential remains significant, as the dim sum bond market remains a mere fraction of the US$1.5 trillion local RMB bond market as of the end of 2013.