Alibaba to Kaisa may get boost from Southbound Bond Connect

A program allowing mainland Chinese investors to buy bonds in Hong Kong may give a liquidity boost to dollar bond issuers, ranging from e-commerce giant Alibaba Group Holding Ltd. to high-yield real estate company Kaisa Group Holdings Ltd.

Bloomberg Market Specialist Qi Li contributed to this article. The original version appeared first on the Bloomberg Terminal.

The coming southbound leg would complete the loop for the Bond Connect program, which started in 2017 by giving global investors access to China’s bond market. Sales and liquidity have been surging this year for offshore dollar notes sold by Chinese issuers, known as Kungfu bonds, and offshore yuan securities, known as Dim Sum bonds.

Analyze new issuance with the Fixed Income Search function and use the Trades Aggregation and Trade History tools to track trading volumes.

 

The entire universe of bonds that looks set to be part of the Southbound Bond Connect program can be found by running SRCH @SOUTHBOUND. The final rules for the permitted transactions and a start date have yet to be announced. Kungfu bonds can be found by running SRCH @KUNGFUBOND and Dim Sum bonds by running SRCH @DIMSUM.

To see rising issuance of Kungfu bonds and save the universe for further analysis:

• Type “kungfu” in the command line and select SRCH @KUNGFUBOND - Fixed Income Search: Kungfu Bonds.
• Click Actions, Save as New and name it Kungfu Bonds for easy retrieval in analysis below.
• Click Additional Analysis Options and then League Table | LEAG.
• Change Table View to Credit and Role to Issuer.

Kungfu bond sales rose almost 15% this year, driven by tech companies funding expansion, and real estate or asset management companies refinancing. Internet giants Alibaba, Tencent Holdings Ltd. and Meituan accounted for about $12 billion of the $109 billion in total issuance. Developer Kaisa and bad debt manager China Cinda Asset Management Co. made the top 10.

While Dim Sum bond sales rose 217% this year, they reached only $22.9 billion and were dominated by banks.

To see how trading volumes have risen for Kungfu bonds this year:

 

• Type “trades aggregation” in the command line and select TAGG - Trades Aggregation. The shortcut is TAGG.
• Click the pencil to the right of Universe and tick MIFID and TRACE. Click Close. MiFID II introduced more transparency for the European bond market since January 2018. The U.S. Trade Reporting and Compliance Engine started in 2002.
• Set Cur to USD.
• Change Period to Custom and change the start date to 01/03/18.
• In the List amber box type “kungfu bonds” and select that from My Lists.
• Set Group by to Issuer.

Tech and real estate issuers were the most active since 2018, with Alibaba seeing 36,000 trades worth $56 billion. China Evergrande Group, whose bonds are trading at 80-85 cents on the dollar, ranks second at 30,000 trades worth almost $29 billion. Trading volume has increased from levels seen in 2018, especially at the start of this year when tech giants sold bonds.

More recently distressed debt trading has been the focus. To see this:

 

• Click Period and select 3 months.
• Change Group by to Security.
• Click the Trades column heading to rank.

China Huarong Asset Management Co. has two bonds in the top 10, while developers Kaisa, Shimao Group Holdings Ltd. and Evergrande also appear as high-yield debt trading became a focus.

To analyze the most-active bond, a Huarong perpetual, in more detail:

 

• Open another screen and drag HRINTH 4 1/2 PERP into the command line.
• Type “trade history” in the command line and select TDH - Trade History.
• Click the gray Chart tab at top left.

The spread to benchmark for Huarong perpetuals surged on April 15 amid net selling by dealers on TRACE and MIFID, seen in red on the bottom panel. That raises the question of whether mainland investors were buying through channels that have lower disclosure requirements.

The picture is different for tech bonds.

 

Drag BABA 2 ⅛ 02/09/31 into a separate screen to run a TDH chart. This Alibaba bond saw the most trading after its issuance in February. Volumes died down as the bond’s spread to benchmark narrowed to below 75 basis points from above 100. See data on Spread and Volume in the Insights panel below the charts.

There is liquidity at both ends of the credit spectrum for Chinese investors to explore when the Southbound Bond Connect begins.