Slowest summer sales in three years for dim sum bonds
Borrowing costs surge and yuan gains slow as Beijing eyes easier access to local bond markets
Dim sum bond issuance continues to be sluggish after the slowest summer sales in three years as the advantage to mainland firms of borrowing offshore diminishes along with reduced expectations for appreciation of the yuan.
Issuances excluding certificates of deposit slumped to 1.9 billion yuan (HK$2.4 billion) in the past two months, compared with 22 billion yuan in the same period last year and 24 billion yuan in 2011, data shows.
Dim sum offerings were equivalent to US$86 million this month, including a sale by Swire Pacific, compared with US$835 million of new US dollar securities from mainland firms.
Dim sum borrowing costs are surging amid slower yuan gains as Premier Li Keqiang targets a reduced pace of economic growth and eases restrictions on investing in local bond markets.
The average dim sum sovereign yield was 48 basis points lower than the similar rate in Shanghai on Wednesday, compared with a record 275-basis-point discount in June 2011, HSBC indices show.
"There's limited incentive for issuers to tap the dim sum market, as they no longer see attractive cost advantages," said Ronald Lee, the chief trader for fixed income at the Hong Kong branch of Bank of Communications, the mainland's fifth-largest lender by market value. "For investors, liquidity is the most important factor. That's why they prefer dollar issues over dim sum bonds."
More than US$47 billion has left funds investing in emerging markets since May as the US Federal Reserve signalled it might reduce its stimulus, bringing this year's net outflow to US$7.5 billion, according to EPFR Global. Withdrawals from Asia were US$1 billion in the week to September 4, half of which came from China's exchange-traded funds, Citigroup said last week, citing EPFR data.
The Fed will pare its US$85 billion of monthly bond purchases next week, according to 65 per cent of economists in a survey last month.
"Dim sum primary prints were impacted by cautious investors facing massive emerging-market outflows," said Frank Huang, the head of trading at SinoPac Securities Asia. "I don't see much investor interest in the space. We don't have a lot of selling points with the yuan at the moment."
The average yield on sovereign dim sum bonds, which are yuan-denominated securities issued outside the mainland markets, rose 73 basis points this year to 3.47 per cent on Wednesday. The rate on onshore government debt advanced 23 basis points to 3.95 per cent in Shanghai, HSBC indices show.
The yuan has weakened 0.16 per cent from a 19-year peak of 6.109 per US dollar on August 16 in Shanghai. It is little changed this month. The yuan will finish this year at 6.12 per dollar, according to the median estimate in a survey. That would translate to a gain of 1.8 per cent for the year, less than an average 3.1 per cent annual rise for the past three years.
The currency's stability and a recent rebound in economic data make the country a relatively secure investment destination among developing nations, say Bank of America economists.
The first dim sum bonds were issued by China Development Bank in July 2007 as part of efforts to increase global use of the yuan. The market took off in July 2010 when the government allowed firms other than mainland and Hong Kong banks to issue them.
In 2011, Beijing started the renminbi qualified foreign institutional investor (RQFII) programme, which lets foreign investors buy higher-yielding onshore debt with yuan raised overseas. A total of 127.8 billion yuan in RQFII quotas had been approved by August 29, the State Administration of Foreign Exchange said.
The value of outstanding bonds in the mainland interbank market was 25 trillion yuan at the end of last month, compared with 250 billion yuan in the offshore dim sum debt market.
"When there isn't much cost benefit in offshore financing, Chinese companies would prefer tapping the domestic market, given a much larger investor base," Huang said. "Onshore financing also means corporates won't have to seek approval to repatriate funds.
"To investors, RQFII gives them the alternative to get returns higher than dim sums."