Government yuan bond bomb may turn out to be a dud

Stretching back to September 2009, when the Ministry of Finance issued its first yuan bond in Hong Kong, public demand was so strong that retail clients were given the larger part of the deal - five of the six billion yuan on offer.

The attractions were clear. Hong Kong investors were stockpiling yuan at the time as the currency was clearly on an appreciation path, local yuan deposit rates were negligible and there were few other investment options out there.

Forward to this week and the ministry is back again. It intends to issue 28 billion yuan of debt into Hong Kong this year, with 16 billion yuan tendered to institutional investors on Wednesday, and the rest offered to the public and institutions in the second half.

This time however, the ministry may find the sale to Hong Kong retail investors tough going.

"I think it will be a challenge," said Alfred Mak, head of investment products and advisory, Bank of East Asia. "A lot of commercial banks are offering 3-plus per cent for term deposits in yuan. Investors will use that as a benchmark. For retail investors they do not see too much of a difference [in the risk of deposits versus Chinese sovereign bonds]."