Dim sum bond sales double as new elite back global yuan

Dim sum bond sales by Chinese borrowers surged to a four-month high in November as the country’s new political elite signalled a commitment to making the yuan a global currency.

Beijing Capital Land, the developer whose shares have risen 94 per cent this year, led a doubling of yuan-denominated debt sales in Hong Kong to 5.5 billion yuan (US$883 million) this month. That’s the most since companies sold almost 6.7 billion yuan in July. Corporate dim sum returned 6.6 per cent this year, compared with a loss of 3.2 per cent last year, while similar- maturity domestic company securities returned 4 per cent, according to Bank of America Merrill Lynch indexes.

Chinese companies increased sales of dim sum notes after the country’s new leaders committed to opening the economy, the yuan strengthened to a 19-year high and borrowing costs fell to the lowest in eight months. Vice Premier Li Keqiang, set to take over as premier in March, pledged last week to liberalize exchange rates, while Party General Secretary Xi Jinping said in his inaugural speech he will open the economy further.

“Supply of dim sum bonds will increase because of the push to internationalise the yuan,” said Wee-Khoon Chong, Asia rates strategist at Societe Generale in Hong Kong. “There isn’t as much of a yuan-appreciation story so investors will be assessing issuers on their merits. On the other hand, there is no depreciation risk.”

Shandong Sale

Shandong International (Hong Kong) Limited, an indirectly wholly owned subsidiary of toll-road operator Shandong Hi-Speed Group sold 1 billion yuan of 5.8 per cent bonds, according to data compiled by Bloomberg.

China will “steadily” push forward with the liberalisation of interest rates and currency markets, Vice Premier Li wrote in an article published in the People’s Daily on November 21. Yuan capital account convertibility will be achieved “gradually,” he wrote.

General Secretary Xi allowed experiments in yuan trading in Hong Kong when he was the top communist party official in charge of the city’s affairs. His replacement in that role will be Vice Premier Zhang Dejiang, Hong Kong-based The Standard newspaper reported yesterday, citing a person it didn’t identify.

The pace of currency reform is set to accelerate, according to Paul Mackel, HSBC Holdings’s head of Asian FX research and Ju Wang, a senior Asian FX strategist at the bank. Full convertibility is likely within five years, they wrote in a research note dated Nov. 29.

“We believe internationalisation of the renminbi is a clear direction and policy of the government,” said Samson Lee, head of debt capital markets at BOC International, a unit of Bank of China, referring to the yuan by its alternative name. “The change of government maybe slowed things down a little recently, but I think in the longer term it’s definitely going in that direction.”

Investor appetite for yuan securities is reviving as the yuan surged to a 19-year high this week.

The yuan strengthened 0.03 per cent to 6.2263 per dollar today in Shanghai, according to the China Foreign Exchange Trade System. China’s currency reached 6.2223 on November 27, the strongest level since the country unified official and market exchange rates at the end of 1993. It has advanced 2.7 per cent since reaching this year’s low on July 25.

The People’s Bank of China lowered the fixing by 0.03 per cent to 6.2892 per dollar today. The yuan is allowed to fluctuate a maximum 1 per cent on either side of that rate.

Currency Reform

A better outlook on the currency is an essential reason behind why issuers are tapping the market and are more confident, says Crystal Zhao, a fixed-income analyst at HSBC. “Liquidity is improving so that attracts the Hong Kong and Chinese issuers to the space.”

Chinese central bankers have said they will widen the yuan trading band at some point.

Reform of convertibility will be the next step in the overhaul of the exchange-rate system, Zhou Xiaochuan, China’s central bank governor, said at a conference in Beijing Nov. 17.

“We are going to realise it, we are moving in this direction, we need to go further, we will have some deregulation,” Zhou said.

The government plans to increase the Renminbi Qualified Foreign Institutional Investor Programme by 200 billion yuan from 70 billion yuan, Guo Shuqing, chairman of the securities regulator, said November 11. The system allows investors to put yuan raised offshore into mainland markets.

Beijing Capital, whose projects include the five-star InterContinental Beijing Financial Street hotel, sold 2 billion yuan of three-year securities to yield 7.6 per cent on November 22, according to data compiled by Bloomberg. The issuance is the largest single-tranche Dim Sum offering by a company since HSBC raised the same amount in April, the data show.

Agricultural Bank of China and China Construction Bank both sold 1 billion yuan of three-year notes at a 3.2 per cent yield this month. Datang International Power Generation, Beijing-based power plant operator, sold 500 million yuan of bonds priced to yield 5.2 per cent.

The average yield premium on top-rated three-year company bonds over sovereign notes jumped 15 basis points this month to a five-month high of 155 basis points as of November 28, according to Chinabond indexes.

The yield on the benchmark 10-year government note fell two basis points to 3.53 per cent at 1:25 p.m., according to Chinabond.

Sales of dim sum securities by international companies, outside China and Hong Kong, more than quadrupled to 5.4 billion yuan in November from 1.2 billion yuan last month, the data show.

Volvo, the world’s second-largest truckmaker sold their first yuan-denominated notes in Hong Kong this month. Volvo issued 1 billion yuan of three-year securities at 3.8 per cent, the data show. Volkswagen and Caterpillar. also raised 1 billion yuan from sales of dim sum bonds this month. The German automaker sold five-year debt at 3.75 per cent while Caterpillar sold debt due November 2014 at 3.35 per cent.

“In the past, dim sum bonds have been the domain of Chinese-domiciled entities, which are usually banks,” said Swee Ching Lim, Singapore-based credit analyst at Western Asset Management, which manages US$459.7 billion as of September 30. “Now we are getting a whole plethora of different issuers that helps get investors’ attention.”