Dim sum bonds under pressure from cheaper yuan and rise of panda bonds
Dim sum bonds, once the darling of investors and foreign firms seeking Chinese funding, have been feeling pressure from a cheaper yuan and the rising popularity of panda bonds.
The cheaper yuan means a decline in the value of dim sum bonds – yuan-denominated debt sold in the offshore market in Hong Kong – and that makes them less attractive to investors compared with bonds denominated in strengthening currencies, primarily the US dollar.
Since August 11 last year until last week, onshore yuan traded in Shanghai has weakened 7.14 per cent against the US dollar while offshore yuan traded in Hong Kong is down 7.36 per cent during the same period.
According to data from Thomas Reuters, the total amount raised through dim sum bonds in 2015 was 163.3 billion yuan versus 337.7 billion yuan in 2014. The amount raised so far this year is 76.2 billion, less than half of last year.
“Expectations for a weaker yuan has to some extent dampened investor enthusiasm [for dim sum bonds],” said Ying Jian, senior analyst at the Bank of China (Hong Kong).
However, from the point of view of the companies seeking to raise funds, “yuan-denominated bonds are becoming more attractive”, said Tony Chen, a credit analyst at Nomura International (Hong Kong).
“With an interest rate hike by the Federal Reserve approaching, which will increase funding costs for companies issuing or servicing USD-denominated bonds, many companies are choosing to reduce US dollar debt and increase yuan-denominated debt,” said Chen.
However, panda bonds – yuan-denominated debt sold by foreign companies in the onshore market on the Chinese mainland – are stealing dim sum’s thunder.
With dim sum bond issuance slowing, panda bonds have outperformed. The cumulative yearly amount raised through panda bonds up to June 20 is double the total raised for all of 2015, according to Bloomberg data.
“The fast growth could be attributed to cheaper onshore funding costs,” said Chen.
Since 2014, the People’s Bank of China has cut interest rate six times and the low funding cost environment is expected to continue as China keeps monetary conditions loose to support its sluggish economy.
While their attractiveness is declining, dim sum bonds still enjoy some advantages.
“The barrier for dim sum bond issuance in the offshore market is much lower than the onshore market,” said Bank of China’s Ying.
Mark Reader, fixed-asset analyst at Mizuho Securities, also believes the central government may increase its requirement for bond issuance for some sectors of its onshore market and that could push some potential issuers to try the offshore market in Hong Kong instead.