China's offshore bond market looks to be booming with record issuance and strong demand, but rather than the global market that was hoped for it has been a speculative play on the yuan dominated by Chinese issuers and investors.
The "dim sum" bond market has been largely shunned by big U.S. and European institutional investors, and worries about the lack of information on issuers, debt structures and rights in case of a default mean that is unlikely to change soon.
Despite record half-yearly issuance of 359 billion yuan ($58 billion) in the first six months of 2014, the perception that it is an insider's market has hampered its global development and intended role in helping internationalize the yuan.
"You've got to be a fairly specialist investor to be interested in these bonds if you are in Europe because a lot of issuers are below investment grade, an area we wouldn't seek to invest in," said Andrew Main, a managing director at London-based Stratton Street with assets of $1.55 billion at end May.
A slowdown in the economy and volatility in the yuan has tempered enthusiasm for Chinese debt among foreigners. And with Beijing starting to allow companies to default on debts instead of bailing them out, as part of its push to introduce more market discipline, investors have to better assess their risks.
Year-to-date U.S. dollar returns are negative for an index of dim sum bonds compiled by HSBC, compared to a 6.8 percent rise in 2013. In comparison, a similar index measuring returns for Asian companies selling U.S. dollar debt returned 6.6 percent compared to minus 2.4 percent in 2013.
A fund manager in Hong Kong attended an investment forum in London, but found very few investors involved in the dim sum market due to the difficulty in doing fundamental analysis on Chinese issuers.
"Some asset managers in Europe try to avoid buying yuan bonds after so many negative new headlines about China," the fund manager said on condition of anonymity as he wasn't authorized to speak to the media.