It’s a lot harder for David Yim to rack up the airline miles these days. The bond underwriter at Standard Chartered used to fly across the Pacific from Hong Kong to the US four or five times a year to arrange dollar-debt deals, but he’s not sure he’ll make it even once in 2017.
Such is the gravitational pull China is having on the market for dollar bonds issued by Asian companies and banks. Borrowers used to tap US-based investors when they sold dollar securities. Now, there’s a big enough pool of greenbacks in Asia and predominantly Chinese buyers are able to take up the vast majority of bonds sold in dollars.
Within three years, this market may reach $1tn, composed mostly of Chinese dollar bonds, according to projections from Australia & New Zealand Banking Group. Big Chinese demand may be changing the risk dynamics of the dollar bond market in Asia, according to market watchers.
“Having a Chinese buyer means there’s a different risk profile – it’s not like Western money managers investing in Thailand before the Asian crisis,” said Nigel Pridmore, a long-time capital-markets attorney and partner in Hong Kong at law firm Ashurst.
Evidence of the impact of the change was on display this month, when financial markets round the world were roiled by escalating tensions between the US and North Korea. Among the harder hit markets was US high yield – also known as junk-rated – dollar bonds. But premiums on junk-rated Asian dollar bonds by comparison barely moved:
“We’ve witnessed Asia’s offshore bond markets become the less-volatile part of global credit – on this firmer local demand,” said Owen Gallimore, head of credit strategy at ANZ in Singapore. That in turn is pulling in some global asset managers to the market, he said.
But with locals now dominant, there’s a welter of new dangers to consider, starting with Chinese financial regulations.
China’s move to contain leverage in its domestic financial system has made it more expensive to sell debt onshore, something that’s helped fuel the boom in Chinese dollar-bond issuance. Private-sector property developers that might find it tough to get loans from state-owned banks have been among the biggest sellers.
These dynamics can shift abruptly if Chinese regulators change policy. And this summer’s surprise crackdown on big private conglomerates’ overseas acquisitions is just one example of how quickly the picture can change. Any move by officials to rein in Chinese funds’ purchases of dollar debt – or companies’ and banks’ ability to sell it – could have a dramatic effect.
“The weakness to the ‘China bid’ is its homogeneous nature and strong but unpredictable regulatory oversight,” said Gallimore. “We have intra-Asia capital flight risks now rather than US and European capital flight risks.”
As the market expands, it one day may pose contagion risks to assets outside the region, much the way a surge in European bond yields can have a global impact. For now, foreign concerns centre on a less-disciplined approach towards best practices. 
Market participants from non-Asian institutions sometimes complain privately about “crowding out” from Chinese buyers, who have in some cases brought looser standards from the onshore bond market.
In China, almost two-fifths of corporate debt is improbably graded AAA, by domestic ratings companies, and bond desks lack the kind of extensive back offices to check deals or research teams to do due diligence that are found at fixed-income operations in developed nations. A record number of debut dollar bond deals by lesser-known issuers makes it tough for analysts to keep up.
The surging Asian issuance is a new chapter for the offshore dollar-bond market, which was created by the Europeans more than half a century ago. Spurred by the desire to tap a broad, international pool of capital, the manager of Italy’s highways sold the first so-called Eurobond in 1963.
It also reflects a long-held aim of Asian policy makers to encourage money to stay within the region, ever since the 1997-98 financial crisis that saw economies and corporate empires collapse after excess borrowing in dollars when local exchange rates were overvalued.
Nations across the region have made great efforts to build local-currency bond markets, and encouraging retention of dollars in Asia – much of which come from trade surpluses – is another aspect of their approach. For Yim, the head of debt capital markets at Standard Chartered for greater China, the market’s change has meant spending more time in his home base Hong Kong, not just because of less business travel. Years ago, August was a quiet month when Asian bankers could go on Western-style summer holidays. Nowadays, issuance continues apace through the month. It’s Chinese New Year, in January or February, that’s become the dead-zone for sales.
“Back in 2010, 2011 if you wanted to sell even $200 to $300mn for say a PRC property issuer, you had to go to the US,” Yim said in an interview last month, using the acronym for the People’s Republic of China. “Now you can do Reg-S issues at $2bn and there’s not much difference in pricing.”
China Evergrande Group, a junk-rated company that’s China’s biggest developer, set a new bar for the size of deals that can be done in Asia with a $6.6bn Reg-S sale in June.
The ultimate test of resilience to an outside shock might still be looming, however, as the Federal Reserve keeps up its campaign of normalising monetary policy.
Robert McCauley, an adviser to the Bank for International Settlements with decades of experience analysing global debt markets, concludes that “it was the stock of dollar bonds issued by non-financial borrowers outside the US that proved most responsive” to policy makers’ drive to reduce longer-term borrowing costs.
Over the longer haul, events outside Asia will prove less important, observers in the region say.
“Asian capital markets, with China at the centre of it, are going to be transformational,” and the dollar-bond market is part of that, said Luke Spajic, head of portfolio management for emerging Asia at Pacific Investment Management Co in Singapore.
There are “so many more companies that need to come to market in Asia” for dollar bonds, Spajic said in an interview while on a visit to Beijing. 
“Asia has a big savings pool – this is their natural stomping ground. There is enough demand in this region to scoop up all the securities.”



Related Story