Chinese Banks Position to Tighten Market for CLO Triple-As

Chinese banks and institutional investors are dipping into the US CLO triple-A tranche market for its perceived safety and strong returns, according to multiple sources in the market. Market participants believe that Chinese banks could emerge as incremental buyers of CLO triple-As in the second half of 2024.

Huatai Securities, a top investment bank in mainland China, has already entered the US CLO market with an appetite for triple-As, several sources said.

“Chinese banks are likely to buy US triple-As for capital reasons,” said one of the sources, “CLOs would be one of the options for Chinese investors seeking higher returns, because at home, the higher-yielding assets are considered to be highly risky.”

The real estate crisis drove Chinese investors to seek out investments in US dollar assets, as it’s easier for them to make hedged exchanges versus getting into the smaller European market, the source added. “People want to diversify. They don’t want to put all their eggs in one basket.”

One senior executive of CLO structuring said that the Chinese securities firm has stepped up the pace of its CLO purchases, as the tranche provides “safe and good returns” as a strategy to allocate in foreign currency.

Sources also say that Industrial and Commercial Bank of China (ICBC), the world’s largest bank by total assets, has been investing in US CLO triple-As since last year.

Ticket sizes are unclear, but the trend indicates that Chinese investors have been sourcing different outlets to invest in due to the underperformance of the domestic market last year, and especially the real estate sector, said the source.

“They’re already net long USD and are becoming more net long USD in China,” said the source, “CLO triple-As are an extremely safe asset with a spread that makes sense, and less sensitive than buying 10% of a US high grade company.”

Another managing director of US and European CLO structuring said that CLOs are suitable for Chinese investors on condition of regulatory approval, and that banks are keen to hold foreign assets.

“More banks are asking for permission to buy these types of assets, and given how many dollars they have on their balance sheet, maybe it will have an impact,” said the source.

CLO market participants are hopeful that Chinese demand for CLOs could mirror the adoption of the asset class in Japan. Japanese bank Norinchukin, one of the largest US triple-A buyers, recently announced it would expand its CLO portfolio.

Chinese investors maintain a similar appetite to Japanese banks in targeting US triple-As, as they generate safe and good returns, a managing director of a top Chinese asset management firm told Reorg.

“We are far, far away from seeing China being the new Japan,” said the first source, “albeit if they decided to be the new Japan they could be the new Japan tomorrow.”

Huatai and ICBC did not respond to a request for comment.