Tools with Chinese characteristics – Finance – Kommersant

In 2022, ten issuers issued classic bonds worth almost CNY 50 billion. High interest in securities denominated in Chinese currency is shown by both institutional and private investors. The yield on them significantly exceeds the rates on deposits in yuan, in addition, they act as an alternative to bonds in dollars and euros. At the same time, independent purchase of such bonds requires taking into account many factors. Management companies already offer trust management strategies and mutual funds focused on investing in yuan instruments. However, you will have to pay a fee for this.

Issuers open China

Despite Western sanctions and the closure of the external debt market for Russian issuers, 2022 turned out to be very successful in terms of foreign currency borrowings. Taking into account the toxicity of the dollar and the euro, companies switched to the placement of local bonds denominated in yuan. The first such bonds appeared on the market only in July 2022, but quickly won the interest of both investors and issuers. According to Alexander Yermak, chief debt market analyst at BC Region, by the beginning of 2023, 17 issues of classic bonds from ten issuers were circulating on the market in the amount of almost CNY 50 billion (more than 430 billion rubles in equivalent).

The high interest of issuers in yuan issues is associated with the opportunity to both get away from toxic currencies and reduce the cost of financing.

Bonds of issuers of the first echelon were placed for a period of 2-3 years with a coupon of 3.05-3.25%, for a period of 4-5 years – with a coupon of 3.7-3.95% per annum. At the end of the year MMC Norilsk Nickel posted bonds for a period of 3.5 years with a floating rate, which is defined as the value of the annual Loan Prime Rate + 0.1%. In the first coupon period, it amounted to 3.75% per annum.

“Russian companies of the first echelon have set a return benchmark of approximately 3.5% per annum in the domestic market, which in the global market corresponds to the average return on issues of issuers with an A credit rating. Considering the lack of international ratings for Russian companies, it is difficult to draw a parallel and name a fair the level of profitability for their yuan bonds,” notes Alexei Tretyakov, head of Arikapital.

Fragile rates

After the placement of securities denominated in yuan, quotations were predominantly declining, which led to an increase in yields. According to Mr. Yermak’s estimates, out of 13 issues traded on the stock exchange, only three issues of Norilsk Nickel with a floating coupon rate, Alfa-Bank and YuGK have seen an increase in price compared to the placement price. For the rest, prices decreased by 0.2–1.85% of the nominal, which led to an increase in yield by 10–46 bp. p., up to 3.44–4.42% per annum.

“The increase in rates occurred primarily due to the lack of yield benchmarks at the beginning of the placement of bonds last year. In addition, at the end of 2022 and the beginning of 2023, there was a shortage of yuan liquidity in the banking system, which led to an increase in repo transaction rates,” comments Mr. Yermak.

Interest in yuan securities is observed both on the part of institutional investors and banks, and on the part of private investors, since the rates on such securities are higher than on deposits.

According to Banki.ru, the top 10 banks have yields on yuan deposits of 0.5–2.6%. CNY-denominated bonds are generally available for purchase to non-qualified investors, but may require product knowledge testing. According to Ivan Manaenko, director of the analytical department of Veles Capital investment company, among yuan securities there are those that are available only to qualified investors, which can be checked independently in the QUIK trading terminal in the “Complex product” field and referring to the code table.

Risks from China

Such securities, according to market participants, are suitable for investors with a moderately conservative attitude to risk and return. For them, according to Evgeny Chechulin, an investment adviser at Otkritie Investments, a situational decrease in the value of assets is not scary, and they are ready to wait for the necessary period of time to achieve the target profitability. When choosing securities, analysts advise looking at the quality of the issuer, the yield to maturity, and the liquidity of the security.

“In the pursuit of profitability, one should not enter too long securities, while paying attention to the options for early redemption (offers) and the conditions for early redemption of issues at the discretion of the issuers themselves,” notes Ivan Manaenko.

In addition, it is worth remembering about currency risks, since the yuan exchange rate is fully controlled by the People’s Bank of China. According to Mr. Manaenko, intra-annual exchange rate fluctuations can reach +/-16%, which, in comparison with the devaluation of the ruble or the Turkish lira, is not so much.

“In order to avoid the risk of exchange rate revaluation in the event of a strong strengthening of the yuan against the ruble, it is worth first of all to look at securities with a maturity of more than three years,” notes Evgeny Chechulin. “In addition to a small, but still positive increase in relation to investments in ruble securities, the transfer of part of the funds to yuan is an avoidance of ruble risks, that is, diversification of currency risks,” Mr. Manaenko points out.

Collective creativity

As the market develops and new issuers enter it, yields will grow, which will put pressure on the value of circulating securities. In addition, according to Ekaterina Vasilyeva, vice-president of Management Company Pervaya, with the expansion of the yuan bond market, it will become more difficult for an ordinary investor to evaluate and select bonds in a portfolio.

If a private investor is not ready to spend time selecting securities and managing his portfolio, then he can turn to the services of portfolio managers.

Many large MCs for high net worth investors have renminbi bond-focused trust strategies.

Pure mutual funds of such bonds are not yet available to wide retailers, but there are mutual funds of a mixed type – either with substituted bonds of Russian issuers, or with money market instruments.

The only fund yielding yuan yields is the Yuan Savings Fund BPIF managed by Pervaya Management Company. “At the moment, bonds of Metalloinvest, Polyus, Rusal, Segezha and Yuzhuralzoloto are included in the BPIF. The rest of the fund consists of yuan in cash placed in repo transactions secured by clearing participation certificates,” explains Ekaterina Vasilyeva. The benchmark for the fund is RUSFAR (Fair Value of Money Index) in RMB. For its work, the management company will take a commission of 0.3%, plus up to 0.4% will be spent on the remuneration of the depositary and other expenses associated with the work of the fund.

Funds for yuan bonds are also planned to be launched by other management companies. In particular, on January 19, the Central Bank registered the rules of the BPIF “Bonds in RMB” under the management of Ingosstrakh-Investments Management Company. Nikolai Ryaskov, head of the company’s bond department, said that the portfolio includes papers from Rusal, Polyus, Metalloinvest, Rosneft, Segezha, YuGK and Alfa-Bank. “The fund saves the investor’s time. In the event of a significant volatility of the yuan exchange rate, investments in BPIF lead to significant tax savings for long-term investments,” notes Mr. Ryaskov.

Vitaly Gaidaev