Hong Kong's largely unrated yuan bond market is growing fast despite concerns over poor corporate governance at mainland companies.
The offshore yuan bond market came to a standstill last month following fears over the Greek debt crisis and a short-seller's report that Canada-listed Sino-Forest overstated its timber holdings.
Yields on the bonds of Chinese companies, which are heavy borrowers in the international bond market, have risen since last month.
Now there are signs that there has been more active trading in the usually wafer-thin yuan bond market, in which investors tend to hold the bonds until maturity.
Trading volume shot up to 3 billion yuan (HK$3.63 billion) this month compared to just 200 million yuan in January, according to Deutsche Bank estimates.
Investors such as private banks tend to hold the bonds, which typically have an investment term of just three years, until maturity, hoping to capture the gain in the currency.
Banks which are responsible for underwriting bonds also tend to buy up to 95 per cent of what they sell, especially in the case of high- quality companies, leaving little choice in the secondary market.
Liquidity has improved because the supply of bonds has also jumped, giving investors more incentive to sell when a better deal comes onto the market.
Vishal Goenka, head of local currency credit trading for Asia at Deutsche Bank, expects liquidity to persist and yields to come down in coming months.
New yuan bond sales were already up 140 per cent, reaching 85.32 billion yuan as of July this year from 35.68 billion yuan over the same period last year.
While banks used to buy up most bonds, yuan devotees have now extended to fund managers, hedge funds which run global credit strategy and proprietary trading firms. Insurance companies prefers longer dated bonds.
Goenka also expects more overseas firms to tap the offshore yuan bond market for capital, especially those from emerging economies.
Deutsche Bank estimates that 250 billion yuan in bonds bonds will be sold by the end of this year, which has already seen yuan bond sales from Volkswagen and Unilever.
The German bank also joined the parade of bond underwriters with a bullish view that mainland firms would increase their borrowing offshore as long as onshore credit remains tight.
The yuan bond market remains relatively loosely regulated and companies with short track records and weak corporate governance have been able to raise capital in Hong Kong even without a rating.
US-listed LDK Solar, a manufacturer of multicrystalline solar wafers, managed to borrow in the yuan bond market in February but failed to so in the Eurodollar bond market subsequently even after seeking credit ratings from all the major rating agencies, a report by HSBC pointed out.