Dim sum bonds slump 53pc on bearish yuan bets

Offshore yuan bond sales have slumped 53 per cent this year as borrowing costs in Hong Kong surged on bearish bets against the mainland currency.

Dim sum note issuance so far this year has fallen to 26.2 billion yuan (HK$32.5 billion), compared with 55.6 billion yuan in the same period last year. The yuan's overnight interbank lending rate in Hong Kong has surged 204 basis points since the end of last year and touched a record 8.6 per cent on February 6. That is more than triple the past year's average of 2.5 per cent, and came as money flooded from the city into the Shanghai stock market through the stocks through train.

Options markets are the most bearish on the yuan in five years.

"Sentiment on the yuan has worsened this year and offshore yuan liquidity has been quite tight, weighing on dim sum bond issuance," said Crystal Zhao, a Hong Kong-based strategist at HSBC, the top underwriter of the securities. "Appetite for dim sum bonds is unlikely to improve in the near term. The high-yield segment has been under pressure as investors aren't so confident with Chinese private companies."

Options to sell the yuan against the US dollar cost 2.78 percentage points more than those giving the right to buy on Monday, the biggest gap since January 2009. The one-month 25-delta risk-reversal rate surged 95 basis points this month.

Mainland exports fell 3.3 per cent year on year last month, while imports plunged nearly 20 per cent, the most in more than five years. The yuan has declined 1.4 per cent versus the greenback in the past six months, but has advanced against 16 other major currencies.

The trade data indicates it is necessary for the yuan to depreciate as exports were hurt due to its gains against other currencies, said Guotai Junan Securities.