Global uncertainty clouds fixed-income prospects Retail investors in the first yuan-denominated bonds issued in Hong Kong this year are most likely to receive lower returns than previous issues due to the slower pace of yuan appreciation. The Bank of Communications, the mainland's fifth-largest state-owned lender, launched the first yuan bond issue in Hong Kong this year on Wednesday. The mainland lender is selling its two-year yuan bond with a denomination of 10,000 yuan until Wednesday, bearing an annual interest rate of 3.25 per cent. This follows China Development Bank's 5 billion issue in the middle of last year, China Export-Import Bank's 2 billion yuan issue and Bank of China's 3 billion yuan issue. All three issues last year were well received, with the retail tranches two times oversubscribed on average. The bonds attracted investors because they offered a combination of safety and relatively high returns. 'With bond coupon rates of 3 to 3.35 per cent and the yuan appreciating 6.4 per cent last year, investors who purchased the previous issues already pocketed 10 per cent last year,' Andrew Fung, a general manager at Hang Seng Bank, said. However, analysts were concerned that the high returns might not be repeated this year due to a slower pace of appreciation and increasing uncertainty in global capital markets. The mainland currency rose 6.9 per cent in the first half, but many expect the pace of yuan appreciation to be slower in the second half as Beijing is concerned about weakening exports. Yuan non-deliverable contracts indicate that the mainland currency will only rise by about 5 to 6 per cent in the next 12 months. 'Investors can still enjoy an 8 per cent total return if the expectations on the yuan are right,' an analyst said. Mr Fung said investors who did not already have yuan deposits may have to bear higher costs if they needed to convert their Hong Kong dollars into yuan, since the value of the unit had risen substantially. Meanwhile, lenders have widened the buy-sell spread of the yuan after the city's yuan clearing bank widened its spread from 10 basis points to 75 basis points for member banks in May, making conversion costs higher. For aggressive investors, who have shied away from the jitters in the stock market, investing in high-yield foreign currency deposits is also an option. 'Investing in yuan bonds is no doubt a sure bet for a defensive play,' said James Cheung Hoi-ki, a DBS Bank (Hong Kong) forex strategist. 'But the interest return might not be necessarily higher than time deposits in foreign currencies, such as the Australian dollar, which currently pays 6 per cent interest annually.' Observers said investors should take into account whether they have to bear other costs when buying the yuan bonds from placing banks. Mr Fung said there was a service fee of 0.15 per cent charged across the board. That would take the absolute return down to 3.1 per cent without taking the yuan appreciation into account. Some banks may also have other charges, such as custody fees or fees on collection of interest. However, many banks have waived such charges. Separately, some investors might be concerned about the difficulty of disposing of the bonds if necessary before maturity, since trading yuan bonds in the secondary market is not very active. Since the three bond sales last year, yuan deposits in the city have risen, and this is crucial for an active secondary market. Total yuan deposits held in Hong Kong accounts reached 77.7 billion yuan in May, more than double the 33.4 billion yuan at the end of December, Hong Kong Monetary Authority figures show. Mr Fung said yuan bond prices in the secondary market were still higher than the level when they first launched last year due to lack of supply, so selling the bonds in the secondary market might not be a problem. Double take Total yuan deposits have more than doubled The amount of deposits held in Hong Kong accounts in May was: 77.7b
