A sign hangs above the entrance to UBS headquarters in Zurich. UBS’s onshore unit arranged $8bn of domestic sales, 0.7% of the total, ranking second behind Morgan Stanley’s 0.9%.
Global banks including UBS Group and Citigroup are aiming to expand their market shares in Chinese local bond underwriting that now languish below 1%.
UBS’s onshore unit arranged 52.3bn yuan ($8bn) of domestic sales, 0.7% of the total, ranking second behind Morgan Stanley’s 0.9%. Citigroup’s China affiliate was third and Goldman Sachs Group fourth, both with a 0.5% share, as overall issuance surged 30% to 7.6tn yuan, Bloomberg-compiled data show.
“China is now the most important local market for many international banks because domestic issuance is likely to rise,” said Patrick Liu, the co-head of debt capital markets for Asia at UBS in Hong Kong. “We are allocating more resources to our onshore businesses.”
President Xi Jinping is opening China’s 34.4tn yuan bond market as he pushes to expand global use of the yuan, allowing some foreign institutions to invest without pre- approval. After climbing five spots this year, Morgan Stanley still ranks 24th in the table because state-owned lenders dominate both offerings and investment in the market. No foreign arranger has won a license to manage a bond issue regulated by the central bank since HSBC Holdings became the first in 2011.
The joint ventures of the biggest underwriters of Chinese dollar bonds have increased their rankings in onshore arranging this year, as central bank rate cuts prompted a surge in local issuance to a record just as a weakening yuan cut dollar offerings from the nation. South Korea became the first foreign country to sell yuan debt in China’s domestic market, raising 3bn yuan from a panda bond sale.
“We will continue to grow our bond franchise by investing further to support our clients,” said Ken Koo, deputy manager of Citi China Orient Securities, the Citi venture that rose two levels to 36th overall. “We have many multinational issuers who are actively looking at the market.”
The expanding local business is a silver lining for foreign banks as expansion in overseas issuance from Chinese borrowers slows. HSBC Holdings Plc is looking to set up a joint venture in China with a majority equity stake. If approved by regulators, it would be the first securities venture in China mostly owned by a foreign bank.
Dollar note offerings from China are on track for the slowest growth since 2008, rising only 2.1% through December 18 from last year to $94.1bn. That marks a turnaround after issuance almost doubled in 2014 to $92.2bn.
“For our business five to 10 years from now we’d expect the onshore business to be a large component,” said Mark Follett, the Hong Kong-based head of north Asia debt capital markets at JPMorgan Chase & Co, which rose two steps to rank 44th among all underwriters of local notes in 2015. Declining yields onshore and expectations for further yuan weakening will attract more onshore issuance, he said.
The People’s Bank of China cut benchmark interest rates six times since November 2014 by a total 1.65 percentage points to 4.35%, to help bolster the weakest economic growth in a quarter century. The yuan has dropped 4.3% against the dollar this year, pushing up servicing costs on foreign debt. Options suggest there’s a better-than 70% chance it will weaken another 2% by the end of the first quarter of 2016.
The extra yield investors demand to hold AAA rated five- year onshore corporate bonds over similar-maturity government notes plunged 52 basis points this year to 77.4 basis points. By comparison, spreads on investment-grade Chinese dollar bonds over US Treasuries declined only 7 basis points to 180 basis points, according to Bank of America Merrill Lynch indexes.
While foreign banks are expanding onshore underwriting, the market is still dominated by local lenders. International & Commercial Bank of China, China Construction Bank Corp and Bank of China are the top three domestic arrangers this year with shares of around 7% each, Bloomberg-compiled data show.
Chinese property developers, allowed back into the onshore bond market in 2014, more than tripled local offerings to 413.8bn yuan this year as offshore sales halved to $10.7bn. China Vanke Co sold five-year AAA rated onshore bonds in September at 3.5%, almost the same yield as notes issued in the same month by quasi-sovereign China Development Bank Corp. The Shenzhen-based builder paid a coupon of 4.5% on five-year international notes sold last year.
The amount of onshore securities held by overseas institutions jumped 12.7% to 604.2bn yuan as at the end of November from the end of 2014, during which time China’s bond market expanded 19.8%, according to data from ChinaBond’s website.
“We have aligned our business with clients’ needs to have both local and international capital markets access, especially in China onshore where the market is rapidly expanding in a supportive regulatory environment and with falling interest rates,” said Rita Chan, head of China credit capital markets at Goldman Sachs.
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