New Index Offers Better View of Yuan Bonds

October 21, 2014

Western MNCs have shied away from the opaque dim sum market, but a new index offers a clearer view.

Chinese YuanWith demand for offshore RMB bonds surging in the few years, investors are looking for ways to get exposure to China and its currency. To capture this trend, information services provider Markit, partnering with Hang Seng Indexes Company, on Monday launched the Hang Seng Markit iBoxx Offshore Bond Index (HSM iBoxx). The new benchmark will track the performance of the offshore RMB bond market and offer a clearer view into the companies behind “dim sum” bonds.

The current size of the market “pales in relation to the size of established markets,” Markit said in a press release.  Still, “it has managed to double in each of the last three years, and has evolved to see a growing list of multinational companies line up list bonds in Chinese currency.”

And that’s why Markit got involved in the launch of the product:  

  • The value of dim dum bonds tracked by the Markit the HSM iBoxx Overall Bond Index has jumped by 785 percent since the start of 2011
  • Strong investor demand for Chinese exposure and the appreciating RMB has seen these bonds return 13.7 percent since Q1 2011
  • Investment grade Chinese firms trade roughly in line with their investment grade peers in the offshore RMB market
  • Chinese bonds have proved popular in recent years as their AMU has grown to over $1bn, up from $10mn at the end of 2011

According to reports, Randolf Tantzscher, director of indexes at Markit, said institutional investors “need to know average returns rate of the market” and that without the new index, it’s difficult for them to know “whether they achieve the returns merely on luck or because they’ve chosen the right bond.”

The lack of that critical information is likely why the market has been largely shunned by big US and European institutional investors. These investors from the start of the trend have been concerned about the lack of information on issuers, debt structures and rights in case of a default.

Also many of the bonds are unrated, according to Mr. Tantzscher, and institutional investors are not comfortable in having full allocation to unrated bonds. Without the opportunity to do fundamental analysis of the bonds, companies – aside from actual Western issuers like McDonald’s – have stayed away.

But with the new index, Hang Seng and Markit hope to satisfy regional and international investors looking to track the performance of the to-now opaque bonds.

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