China bulls buy record yuan structured notes

Investors chalk up solid gains as they expect the currency to strengthen amid nation's rebound

PUBLISHED : Wednesday, 30 January, 2013, 12:00am
UPDATED : Wednesday, 30 January, 2013, 3:50am

Investors turning bullish on China are buying record amounts of structured notes tied to the yuan as the country recovers from a two-year economic slowdown.

Individual investors in the United States bought US$79.9 million of notes since last month that rise and fall in value based on swings in the offshore yuan.

The nine notes created by HSBC use the highest leverage for such securities to generate yields as much as five times more than the yuan's appreciation.

Banks create structured notes by packaging debt with derivatives to offer customised bets to retail investors while earning fees and raising money.

China's economic growth accelerated in the past quarter for the first time since 2010, fuelling speculation that the government would allow the yuan to rise at a faster pace.

The median forecast of analysts surveyed was for the yuan to gain 2 per cent by the end of this year, following a 1 per cent rise last year, the slowest since 2009.

"In the last six months, we have seen increased demand from high-net-worth investors looking for ways to access the growing Chinese market," said Todd Fruhbeis, the head of structured-product sales for the Americas at HSBC in New York. "We expect this trend will continue given China's continued growth prospects."

The offshore exchange rate tracks the official rate in the domestic market. The official rate is allowed to fluctuate up to 1 per cent on either side of a reference rate set by the Bank of China.

China has pledged to support offshore yuan hubs as it seeks a greater role for the currency in global finance at a time when monetary easing in the US, Europe and Japan is boosting the supply of dollars, euros and yen.

The Bank of England is ready "in principle" to agree a swap line with China's central bank that would help London become a centre for offshore yuan trading, its chief cashier, Chris Salmon, said in London last week. Taiwanese banks will be able to take deposits of and lend in yuan by the Lunar New Year.

Offshore trading in the yuan started in Hong Kong in 2010, where average volume of yuan deals has doubled in the past year to at least US$6 billion a day, according to Standard Chartered.

Transactions in offshore options in yuan swelled to between US$300 million and US$500 million per day, JP Morgan Private Bank said.

The offshore rate traded at 6.2295 yuan per US dollar in Hong Kong yesterday after touching 6.1735 on January 11, the strongest since its 2010 debut. The domestic rate rose to a 19-year high of 6.2124 three days later and traded at 6.2226 yesterday.

Sales of yuan-denominated or dim sum bonds in Hong Kong rose to a record 175.8 billion yuan (HK$218.9 billion) last year, from 152 billion yuan in 2011.