Just 3% of Giant China Dollar Bond Was Bought by Non-Asians

  • Asian diversification doesn’t mean leaving Asia: BlackRock
  • Dollar bond sales in region have already hit an annual record

The biggest dollar bond to come out of China in three years demonstrated the dominance of local demand in Asia’s booming offshore-debt market, with just 3 percent of purchases coming from outside the region.

Growth in the pool of liquidity in Asia has enabled record issuance of $221 billion of dollar bonds so far this year in the region excluding Japan, more than 20 percent greater than what was sold in all of 2016, according to data compiled by Bloomberg. Some estimates show the size of the market is already approaching $1 trillion, while others anticipate that milestone will be hit within the next three years.

Given that context, it’s perhaps no surprise that Postal Savings Bank of China Co. found smooth sailing for its $7.25 billion sale of additional tier-one securities last week, priced just hours after China’s sovereign rating was cut. The largest such sale since an Alibaba Group Holding Ltd. issue in 2014, some 70 percent was bought by Chinese buyers, with 27 percent coming from the rest of Asia.

“Evidence would suggest that the strong regional bid will provide a liquidity cushion for Asian credit in the event of an external shock,” said Robert Nelson, a portfolio manager at the Franklin Templeton Investments fixed-income group in Singapore. "Both ownership and issuance remain modest compared to the size of the economies in the region," giving scope for growth, according to Nelson.

Whether it’s been China’s downgrade by S&P Global Ratings, North Korean tensions or a tightening in Chinese property-market regulations, the Asian dollar-bond market has taken it all in stride this year. The premium on Asian investment-grade dollar bonds over Treasuries has plunged 18 basis points this year, to 167 basis points, near the lowest in a decade, according to JPMorgan & Chase Co. indexes.

Behind that strength is the increasing share of intra-regional ownership. More than 70 percent of Asian dollar bonds have been taken up by Asian investors this year, compared with around 50 percent in 2010, according to a Bank of America Merrill Lynch report earlier this year.

Asset managers, insurance companies and pension funds in the region are increasingly buying dollar bonds to diversify from local holdings. Clifford Lee, Singapore-based head of fixed income at DBS Group Holdings Ltd., says “when onshore holdings are getting too concentrated for some of the Asian investors, they will go offshore.”

And there’s a swelling pool of capital looking for a home. 

  • Asia-Pacific high net-worth individuals held $17.4 trillion of assets as of 2015, surpassing North America for the first time, according to Capgemini SA. 
  • The amount of money being managed for a fee is growing faster in the Asia Pacific region than anywhere else in the world, Jay Wintrob, chief executive officer at Oaktree Capital Group LLC, said in an interview this week in Hong Kong. 
  • Family offices in the region handling $18.7 billion worth of assets boosted their bond allocation to 15 percent of their total portfolios this year, from 13 percent in 2016, according to the UBS/Campden Wealth Global Family Office reports. 

Chinese financial institutions are so far the most active in buying offshore bonds, underpinned by a desire to diversify from yuan assets. The allocation of last week’s Postal Savings Bank issue showed banks take up 52 percent of the sale, with private banks at 8 percent and fund managers at 17 percent. Banks sometimes package such bonds into structured products for high-net-worth customers. The securities were trading at 99.7 cents on the dollar after being priced at par.

“When you think of the demand side, you see growth in the pool of capital from pension funds, insurance companies and private wealth management platforms,” said Neeraj Seth, head of Asian credit at BlackRock Inc. in Singapore. “As they grow, they are looking much more at investment opportunities within the region, and not necessarily exporting all of that capital to developed markets. The demand for good quality fixed income is going to continue within the region.”

— With assistance by David Yong, and Carrie Hong

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