Stock rally puts dim sum bonds back on the menu
50b yuan flows back amid bull run on HK stock market, helping boost appeal of bonds
Hong Kong's stock market surge is reviving the fortunes of the dim sum bond market, with a flood of yuan from the mainland that has chased a massive equity rally boosting the pool of offshore yuan liquidity available for issuers to tap.
A flood of offshore yuan that left the city in the wake of the launch of the Shanghai-Hong Kong Stock Connect scheme that directly links the stock markets of the two cities is now reversing as rules have been eased to let mainland fund managers boost their southbound buying.
"The stock connect drained as much as 110 billion yuan (HK$138 billion) from Hong Kong's banking system between November [last year] and mid-March," Becky Liu, a rates strategist at Standard Chartered Bank, told the
"However, in the past three weeks, we started to see a reversed trend. A net 50 billion yuan has come back to Hong Kong and we expect all the yuan that flew out would come back in the foreseeable future."
It is a turnaround that can barely come quickly enough for a market suffering one of its most barren patches since its popularity caught on in 2011 after a trial launch in 2007.
Total dim sum issuance - bonds denominated in yuan sold outside of the mainland - fell 37 per cent in the first quarter compared with a year earlier, according to data provider Dealogic.
Money flooding southbound from the mainland as investors chase a red-hot rally in Hong Kong stocks - effectively the flipside of the record-breaking rally unleashed in mainland shares when the stock connect began operations - is pumping up the offshore yuan liquidity pool in the city.
Tightness in that pool, which pushed up funding costs, was one of the main drivers of dim sum's first-quarter deterioration, along with the yuan's fall to a two-year low against the US dollar and the default by Shenzhen-based property developer Kaisa Group Holdings. Property companies are among the biggest issuers of dim sum debt.
Average dim sum bond yields have fallen by 20 basis points from a historical peak of 5.06 per cent at the end of last month to an average 4.86 per cent, making it relatively cheaper for firms to issue yuan-denominated bonds.
A sharp decline in US dollar swap rates in the past two months has also made it more attractive to turn dollar holdings into yuan to buy dim sum bonds.
The one-year swap rate fell to 3.27 per cent last week, having hit a high of 4.44 per cent in the middle of last month. Five-year swaps were at 3.35 per cent from 4.3 per cent over the same period.
Dollar-based investors would typically buy dim sum bonds and swap the interest payments back into dollars, enjoying the relatively higher yield offered by yuan bonds to comparable dollar debt.
The lower the swap rate, the more attractive the yuan trade.
The cost of issuing offshore and onshore yuan debt has also converged. The three-year benchmark mainland government bond pays 3.4 per cent onshore and 3.29 per cent offshore.
The revival of investor appetite for dim sum debt was clear last week. Qianhai Financial Holdings drew 13 billion yuan in subscriptions for the 1 billion yuan of bonds it was selling.
But some analysts are cautious about reading too much too soon into the shift. "Even if the swap rate has come down sharply, that doesn't necessarily mean investor appetite will pick up, as lots of investors now are real [yuan] holders and do not need to swap from US dollars," said Frances Cheung, the head of rates strategy, Asia ex-Japan, at Societe Generale. "The yield of dim sum bonds is not that attractive when compared with the red-hot sentiment in equities now."
