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Investing in the CNH Market:

Challenges and Opportunities

by Travis Spence, Managing Director, Head of Global Liquidity Asia, J.P. Morgan Asset Management

Following a decade of double-digit growth, China is now the world’s second largest economy and is considered by many to be the workshop of the world. The continuous growth of exports has given it the world’s largest trade surplus and also the largest foreign exchange reserves. However, until recently it was difficult for international investors to tap into this growth. The creation of the offshore CNY (known as CNH) and the subsequent growth of the CNH bond market - known colloquially as the dim sum bond market – fulfills this need. The opening of the dim sum bond market is potentially the most exciting development in the international bond markets since the creation of the Eurobond market in the 1980s. While challenges and pitfalls exist, not least regulatory opacity abound, the potential is huge.

From a long-term perspective, the offshore CNH market has just begun.

Development of the CNH market

CNH Deposit: The CNH deposit market has been growing exponentially in Hong Kong. The outstanding CNH deposit has jumped over 500% in the last 12 months[1] since the regulations were loosened (from RMB 90bn in June 2010 to RMB 549bn in May 2011). The main drivers for the rapid growth are the RMB appreciation, as well as the Chinese government’s RMB liberalisation move.

CNH (Dim Sum) Bond Market: In June 2007, China Development Bank became the first offshore RMB issuer in Hong Kong, after PBoC allowed qualified domestic financial institutions to issue RMB bonds in the city. The dim sum bond market developed rapidly in 2010 in response to the growth in demand for CNH. Hopewell Highway Infrastructure (RMB1.38bn, 2yr, 2.98%) and McDonald’s (RMB200m, 3yr, 3%) became the first HK and foreign corporate names to issue CNH bonds in Hong Kong, in July and August 2010 respectively. Caterpillar followed in November with a RMB1bn, 2yr, 2.0% issue. We have since seen the issuer base expanding greatly in volume and credit rating. As at May 2011, total outstanding bonds amounted to CNY 110bn; over 50% was issued in 2011 alone (fig 2). The top three issuers are China Ministry of Finance, China Development Bank and China Import Export Bank.

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