海通证券股份有限公司 海通证券研究所
This week's topic: what will be the influence of “bond-connect"?On May 16, the PBOC and the Hong Kong Monetary Authority issued a joint announcement deciding to carry out “bond-connect", the official start time has yet to be announced. As an important step in the opening-up of China's bond market, how will “bond-connect" influence the bond market? 1. In the long term, incremental funds are possible.At present, the size of foreign investors' investment in the domestic bond market is about RMB830bn, accounting for 1.9% of China's bond market, much lower than that of developed countries and other emerging economies, meaning huge growth potential. With the RMB joining SDR and inclusion of RMB-denominated bonds into the international bond index in the future, demand for RMB-denominated bonds in the international market will significantly increase, inthe long term incremental funds are expected to enter the market. 2. Allocation demandis still expected to be dominated by interest rate bonds.More than 90% of current foreign institution’sbond positions are interest rate bonds, and China's focus is toattractinstitutions like central banks and long term investorsthat mainly have asset allocation demand and low risk appetite, meanwhile, the lack of comparability of the domestic rating system and overseas systems also caused the poor understanding of overseas institutions about China's corporate bonds. After “bond connect” is launched, overseas investors are expected to invest mainly ininterest rate bonds; for credit bonds, those with high ratings or international rating coverage may be favored. This will push docking of the domestic rating system with international standards. 3. Short-term impact is limited.Foreign institutions already have a variety of ways to invest in the domestic bond market, currently foreign institutions are relativelycautious towards investing in RMB-denominated bonds. Firstly, the RMB is still facing devaluation pressure, and secondly, the Fed has started an interest rate hike cycle, meaning China-US bond yield spread will be further narrowed; meanwhile the bond market’s continuing adjustment also dampened foreign institutions’ confidence towards the asset. For the short-term, the influence of “bond connect” will be limited. Weekly market review: supply stayed flat, yields rose generally. Primary market net supply was negative RMB70.571bn, which equals that of the previous week. AAA rated bonds had the highest share of 41%, the manufacturing sector continued to rank first, accounting for 31%. There are 2 quasi-municipal bonds among the 59 major credit bonds issued. Secondary market transactions were flat, high-rating bonds performed better. Specifically, among 1Y bonds, the yield for AA and AA-rated bonds rose the most by 8BP, the yield of AAA and AAA-rated bonds was up 3BP, the yield of AAA+rating bonds was down 2BP. Among 3Ybonds, the yield for AA rated bonds rose by 4BP, the yield of AAA and AAA-rated bonds was down 3BP, the yield of AA-rated bonds was down 6BP, and the yield of AAA+rated bonds was down 9BP. Among 5Y bonds, the yield for AA rated bonds rose by 3BP, the yield of AA+ rated bonds rose by 1BP, the yield of AAA-rated bonds was down 2BP, the yield of remaining bonds was down 5BP to 9BP. Among 7Y bonds, the yield for AA+ rated bonds rose by 2BP, the yield of AAA rated bonds was down 4BP, the yield of AAA+ratedbonds was down 9BP. Weekly rating adjustment review: more adjustments were seen. This week we saw 7 rating upgrades for credit bond issuers, with 2 being outlook upgrade, together with 3 rating downgrades, with 1 being rating outlook downgrade. Among the issuers with rating upgrades, Jiaxing High-grade Highway Investment Co., Ltd., Nanjing Railway Construction Investment Co., Ltd. and Zhuhai Huafa Group Co., Ltd. were issuers of quasi municipal bonds, and the remaining 4 were issuers of industrial bonds. The main reasons for rating upgradesare the increase of operating revenue and profit growth and improved debt service capability. The 3 issuers downgraded this week were all industrial bond issuers. Among them, Shanghai Jia Lin Jie Textile Co., Ltd. was downgraded with main reasons of relatively drastic management changes in 2016 that led to increased business uncertainty, as well as the large scale of interest-bearing debt. Guangdong Jinlong Development Co., Ltd.’s rating outlook was downgraded due to prosecution of its actual controller suspected of bribery of state staff during acquisition of Dongguan Securities equity. Investment strategy: Regulatory pressure continues and investors shall be cautious about credit risk.Last week, credit bonds’ performance apparently differentiated based on their ratings, with yields of AAA rated enterprise bonds falling 2BP, yields of AA rated enterprise bonds rising 4BP on average, and yields of quasi-municipal bonds rising 8BP on average. How will credit bonds perform next? We suggest notice to the following points:Breakof rigid repayment of corporate bonds accelerates.On May 16, the Shanghai Stock Exchange and the Shenzhen Stock Exchange respectively issued revised "Measures for the Administration of Investor Qualification in Bond Market". The new regulations raised the threshold of qualified investors. Individuals were required to hold financial assets of no less thanRMB5mn. They cannot invest in bonds with rating below AAA. That means individual investors will be completely excluded from the low rating corporate bond market. Low-rating corporate bond demand declined, but the new regulation only applies to new transaction, which will limitthe impact on the market. The more far-reaching impact is that it is conducive to breaking rigid repayment and promotes the process of building a market-driven corporate bond market.2) Real estate sector’s overseas financing faces constraints.Reuters reported that starting from the second quarter the NDRC basically stopped approval of real estate companies’ overseas bond issuance. Since 4Q2016, the domestic corporate bond, development loan, securities sector non-standard business and other real estate sector financing channels have been tightened. Previously only overseas financing and domestic MTN had not yet seen clear tightening, which led to a surge of issuance of MTN at home and USD-denominated bonds overseas in the real estate sector, however, the effect of current control is still limited, which also means that the tightening trend of financing has not changed, and control of issuance of MTN may also be further tightened. As sales decline, the real estate sector’s liquidity pressure will gradually increase.3) Regulatory impact will continue.Lately interest rate bonds performance stabilized, but credit bonds still saw substantial adjustment, especially those with medium to low ratings and medium to long duration. Rating-based yield spreadrose markedly in line with our forecast. In the early phase of adjustment sentiment and liquidity were major drivers, with interest rate bonds react first, but with the implementation of supervision measures and contracting entrusted external investment, and due to the high proportion of credit bonds in entrusted external investment, creditbonds will see longer and deeper adjustment, the regulatory impact is a slow variable for creditbonds, so there is still upside space for yield spread, especially for those with low ratings.
This week's topic: what will be the influence of “bond-connect"?On May 16, the PBOC and the Hong Kong Monetary Authority issued a joint announcement deciding to carry out “bond-connect", the official start time has yet to be announced. As an important step in the opening-up of China's bond market, how will “bond-connect" influence the bond market? 1. In the long term, incremental funds are possible.At present, the size of foreign investors' investment in the domestic bond market is about RMB830bn, accounting for 1.9% of China's bond market, much lower than that of developed countries and other emerging economies, meaning huge growth potential. With the RMB joining SDR and inclusion of RMB-denominated bonds into the international bond index in the future, demand for RMB-denominated bonds in the international market will significantly increase, inthe long term incremental funds are expected to enter the market. 2. Allocation demandis still expected to be dominated by interest rate bonds.More than 90% of current foreign institution’sbond positions are interest rate bonds, and China's focus is toattractinstitutions like central banks and long term investorsthat mainly have asset allocation demand and low risk appetite, meanwhile, the lack of comparability of the domestic rating system and overseas systems also caused the poor understanding of overseas institutions about China's corporate bonds. After “bond connect” is launched, overseas investors are expected to invest mainly ininterest rate bonds; for credit bonds, those with high ratings or international rating coverage may be favored. This will push docking of the domestic rating system with international standards. 3. Short-term impact is limited.Foreign institutions already have a variety of ways to invest in the domestic bond market, currently foreign institutions are relativelycautious towards investing in RMB-denominated bonds. Firstly, the RMB is still facing devaluation pressure, and secondly, the Fed has started an interest rate hike cycle, meaning China-US bond yield spread will be further narrowed; meanwhile the bond market’s continuing adjustment also dampened foreign institutions’ confidence towards the asset. For the short-term, the influence of “bond connect” will be limited. Weekly market review: supply stayed flat, yields rose generally. Primary market net supply was negative RMB70.571bn, which equals that of the previous week. AAA rated bonds had the highest share of 41%, the manufacturing sector continued to rank first, accounting for 31%. There are 2 quasi-municipal bonds among the 59 major credit bonds issued. Secondary market transactions were flat, high-rating bonds performed better. Specifically, among 1Y bonds, the yield for AA and AA-rated bonds rose the most by 8BP, the yield of AAA and AAA-rated bonds was up 3BP, the yield of AAA+rating bonds was down 2BP. Among 3Ybonds, the yield for AA rated bonds rose by 4BP, the yield of AAA and AAA-rated bonds was down 3BP, the yield of AA-rated bonds was down 6BP, and the yield of AAA+rated bonds was down 9BP. Among 5Y bonds, the yield for AA rated bonds rose by 3BP, the yield of AA+ rated bonds rose by 1BP, the yield of AAA-rated bonds was down 2BP, the yield of remaining bonds was down 5BP to 9BP. Among 7Y bonds, the yield for AA+ rated bonds rose by 2BP, the yield of AAA rated bonds was down 4BP, the yield of AAA+ratedbonds was down 9BP. Weekly rating adjustment review: more adjustments were seen. This week we saw 7 rating upgrades for credit bond issuers, with 2 being outlook upgrade, together with 3 rating downgrades, with 1 being rating outlook downgrade. Among the issuers with rating upgrades, Jiaxing High-grade Highway Investment Co., Ltd., Nanjing Railway Construction Investment Co., Ltd. and Zhuhai Huafa Group Co., Ltd. were issuers of quasi municipal bonds, and the remaining 4 were issuers of industrial bonds. The main reasons for rating upgradesare the increase of operating revenue and profit growth and improved debt service capability. The 3 issuers downgraded this week were all industrial bond issuers. Among them, Shanghai Jia Lin Jie Textile Co., Ltd. was downgraded with main reasons of relatively drastic management changes in 2016 that led to increased business uncertainty, as well as the large scale of interest-bearing debt. Guangdong Jinlong Development Co., Ltd.’s rating outlook was downgraded due to prosecution of its actual controller suspected of bribery of state staff during acquisition of Dongguan Securities equity. Investment strategy: Regulatory pressure continues and investors shall be cautious about credit risk.Last week, credit bonds’ performance apparently differentiated based on their ratings, with yields of AAA rated enterprise bonds falling 2BP, yields of AA rated enterprise bonds rising 4BP on average, and yields of quasi-municipal bonds rising 8BP on average. How will credit bonds perform next? We suggest notice to the following points:Breakof rigid repayment of corporate bonds accelerates.On May 16, the Shanghai Stock Exchange and the Shenzhen Stock Exchange respectively issued revised "Measures for the Administration of Investor Qualification in Bond Market". The new regulations raised the threshold of qualified investors. Individuals were required to hold financial assets of no less thanRMB5mn. They cannot invest in bonds with rating below AAA. That means individual investors will be completely excluded from the low rating corporate bond market. Low-rating corporate bond demand declined, but the new regulation only applies to new transaction, which will limitthe impact on the market. The more far-reaching impact is that it is conducive to breaking rigid repayment and promotes the process of building a market-driven corporate bond market.2) Real estate sector’s overseas financing faces constraints.Reuters reported that starting from the second quarter the NDRC basically stopped approval of real estate companies’ overseas bond issuance. Since 4Q2016, the domestic corporate bond, development loan, securities sector non-standard business and other real estate sector financing channels have been tightened. Previously only overseas financing and domestic MTN had not yet seen clear tightening, which led to a surge of issuance of MTN at home and USD-denominated bonds overseas in the real estate sector, however, the effect of current control is still limited, which also means that the tightening trend of financing has not changed, and control of issuance of MTN may also be further tightened. As sales decline, the real estate sector’s liquidity pressure will gradually increase.3) Regulatory impact will continue.Lately interest rate bonds performance stabilized, but credit bonds still saw substantial adjustment, especially those with medium to low ratings and medium to long duration. Rating-based yield spreadrose markedly in line with our forecast. In the early phase of adjustment sentiment and liquidity were major drivers, with interest rate bonds react first, but with the implementation of supervision measures and contracting entrusted external investment, and due to the high proportion of credit bonds in entrusted external investment, creditbonds will see longer and deeper adjustment, the regulatory impact is a slow variable for creditbonds, so there is still upside space for yield spread, especially for those with low ratings.
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