Dim sum bond issuance set to drop 50pc in second half

Bankers say the issuance could drop 50 per cent as yuan demand increases borrowing rates

PUBLISHED : Saturday, 23 August, 2014, 1:06am
UPDATED : Tuesday, 26 August, 2014, 3:01pm

Dim sum bond issuance could plunge about 50 per cent in the second half of the year from the first half as the cost of borrowing yuan in offshore markets surges relative to the price of raising onshore debt.

Bank executives say policy-easing measures by Beijing to help sustain a mainland economy struggling under a combination of bad debts, industrial overcapacity and volatile export orders will keep benchmark interbank interest rates capped.

Meanwhile, a surge in foreign demand for yuan has pushed up the cost of borrowing the still limited volume of the currency available in offshore markets, making dim sum bonds a less lucrative investment for investors.

"With the rates rising more than 100 basis points over the past four months, the after-swap valuation of dim sum bonds is no longer attractive," said Becky Liu, of Standard Chartered Bank.

The after-swap valuation of dim sum bonds is no longer attractive

Liu expects the total issuance of dim sum bonds in the second half to fall to 200 billion yuan (HK$251 billion) from a record 370 billion yuan in the first half.

HSBC, Bank of China and Standard Chartered are the top three bookrunners of dim sum bonds for the year to date, accounting for 31.6 per cent of the market in terms of the deal value.

All three forecast issuance to slow in the second half, with no more than 200 billion yuan worth of notes to be issued, including the scheduled batch by the Ministry of Finance in autumn.

The mainland's benchmark money market rate fell for a fourth week with the seven-day repurchase rate down three basis points at 3.5 per cent in Shanghai, a daily fixing from the National Interbank Funding Centre showed. The rate fell on the belief the government will ensure there are enough funds in the system to spur economic growth.

It has been popular for dollar-based investors to buy yuan in the foreign exchange market and then purchase dim sum bonds to lock in more lucrative yields than the zero per cent interest on US dollar deposits.

To hedge the exchange rate risk, investors buy a cross currency swap to sell yuan and buy back US dollars. They would be able to earn from the spread between dim sum bond yields and the currency swap rate.

"The [dollar-yuan swap] rates are likely to stay elevated, and could move higher, as onshore-offshore convergence accelerates," Liu said.

The one-year swap rates between the dollar and the yuan hit a one-year-high yesterday at 2.4 per cent, leaving a thinner profit margin for dim sum bond investors.

The average dim sum bond yields are 4 per cent to 5 per cent.

More investors are demanding the yuan while deposit growth in the offshore yuan market slowed.

Another reason for the slowdown in the offshore yuan bond market is an easing in monetary conditions by the People's Bank of China such as reserve requirement ratio cuts and the adjustment of the loan-deposit ratio calculation.

"This gave us some comfort that the government will introduce more measures to contain the funding cost to the economy, if needed, at least for this year," said Crystal Zhao, of HSBC.