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RMB bond market on rise despite ratings uncertainties

Over the past few years, the offshore RMB (renminbi) bond market has caught the attention of both institutional and retail investors as the Chinese government has been actively growing the market, supported by ever-improving policy initiatives. Attracted by the depth and breadth of the market, large firms in mainland China and Hong Kong are moving into offshore RMB bonds - a development that bodes well for the long-term growth of this bond market.

For multinationals with significant operations in China, the issuance of offshore RMB bonds is a good way of raising yuan funds needed to support expansion in the country while helping to mitigate exchange rate risks. For relevant enterprises and institutions in China, offshore RMB bonds provide a more attractive and cost-effective alternative of funding in addition to bank loans and corporate bond markets in the country.

While some such issuances have not been rated, it is only because credit ratings have not been obtained by issuers at the time of issuance, and many of them are financially credible state-owned enterprises. There are also some financially sound issuers that have not sought credit ratings because of technical or structural problems.

As a result, some investors may refer to the credit ratings attained by these issuers for their onshore bond issuances. However, given the difference between onshore and offshore markets, the rating standard and method adopted in China may vary from internationally recognised standards. This means that the credit ratings for onshore bonds may not be on a par with those accorded by international credit rating agencies.

That said, there is no shortage of strong international blue-chip companies with redoubtable credit quality among offshore RMB bond issuers, which include enterprises, financial institutions, sovereign governments and state agencies around the world and in China.

Based on an analysis of the offshore market conducted by HSBC Global Research in July, the credit quality of 85 per cent of offshore RMB bonds issued but not yet due (including certificates of deposits) is comparable to the investment grades (including some unrated bonds and certificates of deposits whose credit quality is considered equivalent to the investment grades). For investors, exceptional credit quality offers a good climate for investment.

As the offshore RMB bond market is relatively new compared with other bond markets and still undergoing rapid growth and transformation, investors may not be well versed in the credit quality and relevant information of issuers. This is where investment professionals with a thorough understanding of and extensive experience in the mainland market can come in and help investors explore long-term investment opportunities.

_ Bonnie Lam is managing director and head of wholesale business, HSBC Global Asset Management, Asia-Pacific.

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