Coming soon to a portfolio near you: Chinese bonds. Like it or not, fixed-income securities from the mainland’s vast, opaque and increasingly default-prone debt market are about to go more global. The good news is that Beijing has been paying attention to international investor concerns over the way the notes are sold and traded.
Premier Li Keqiang said that China will allow overseas investors to buy mainland debt through an exchange trading link with Hong Kong this year. Hong Kong Exchanges & Clearing Ltd. had already indicated that it planned to expand its stock connect program with China to include bonds.
The government has been laying the groundwork for foreign access. In December, the Ministry of Commerce and the National Development and Reform Commission suggested they may remove restrictions that prevent international rating companies from operating in mainland China. That could deal with the questionable prevalence of high credit rankings awarded by domestic firms.
Changes are also happening at the micro level. Earlier this month, SAIC-GMAC Automotive Finance Co., General Motors Co.’s Chinese auto-lending joint venture, sold a bond backed by car loans that was graded by Fitch Ratings. It was the venture’s first asset-backed security to be rated by Fitch, which gave the senior portion of the deal an AA score.
The London-based rating company wasn’t hired for previous issues and had been vocal about its misgivings. In June 2015, when SAIC-GMAC started to get its Chinese asset-backed bonds rated by international firms, Fitch published an unsolicited opinion in which it claimed the bonds didn’t
follow global best practices.
“The transaction does not have an initial liquidity facility available to protect against any payment disruption (for example, in the event of servicer termination); at the same time, it has no back-up servicing arrangements in place.”
The latest installment, scored by Fitch, included such a facility. It’s unclear what prompted the change of heart at SAIC-GMAC. But it may be a sign that asset-backed securities in China will start to look more like the debt paper that’s sold in, say, Germany or the US.
That’s good not only for global investors but also for those in China, given that issuance has spiked since structured debt was allowed in 2013, reaching a monthly record of 97.6bn yuan in December.
Morgan Stanley said this week that it expects Chinese government bonds to become eligible for major benchmarks over the next three years, triggering inflows of at least $250 billion, and Citigroup plans to include the nation’s onshore sovereign bonds in some of its gauges.
Given the pressures and challenges facing corporate debentures, moves to open the market to overseas investors may look premature. But as Beijing revamps its $8 trillion debt market, it may soon seem odd not to have the country’s local bonds in global benchmarks.
Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street
Journal and Mergermarket