Hong Kong’s dim sum bond market seen bottoming out amid rising yields, strengthening yuan
Western Asset Management, which manages US$442 billion, has been adding to its portfolio of dim sum bonds because of its positive view on the yuan
A modest recovery in Hong Kong’s dim sum bond market is likely this year as yields rise to attractive levels after the deleveraging efforts by the People’s Bank of China and rapid appreciation of the yuan in recent months, say analysts.
Activity could increase further if internationalisation of the yuan accelerates, they added.
Dim sum bonds have fallen out of favour since 2015 because of investors’ reluctance to hold yuan-denominated assets because of concerns over a weakening yuan and China’s soaring debt levels.
Total issuance of dim sum or yuan-denominated bonds in Hong Kong slid from 52.9 billion yuan (US$6.8 billion) in the second quarter of 2016 to 18.6 billion yuan in the second quarter of 2017, falling further to 11.9 billion yuan in the third quarter 2017 before rebounding slightly to 20.7 billion yuan in the fourth quarter of 2017, the highest quarterly issuance in a year, according to Thomson Reuters data.
Western Asset Management, which manages US$442 billion, has been adding to their Chinese bond portfolio positions since the second half of last year, mostly centred around offshore dim sum bonds.
“We prefer dim sum bonds mainly because we have a positive view on the yuan,” said Desmond Soon, head of investment management for Asia at Western Asset Management. “We are able to get bonds at 4 per cent (return) which we find is quite attractive.”
The yuan has been trading near 25-month highs amid a weak US dollar while China’s external account continues to be robust and fund outflows have peaked after the government’s tight capital controls. In December, China’s trade surplus widened to US$54.69 billion, the most in almost two years.
Soon likes dim sum bonds from sectors of strong investment-grade, multinational names as well as the liquid, Chinese government issues that give a 20-30 basis points pick up over their onshore equivalent Chinese bonds.
Standard Chartered Bank analyst Eddie Cheung said that activity in the dim sum bond market could further be supported if the PBOC accelerates the yuan’s internationalisation after the setback in 2015.
On January 5, the PBOC issued a circular aiming to promote cross-border yuan business by allowing easier remittance of yuan-denominated proceeds from overseas bond or equity issuance. It also said requirements for opening and maintaining yuan special accounts would be relaxed which would facilitate yuan-denominated foreign direct investments.
A modest recovery in the offshore yuan bond issuance may come as the dim sum market becomes more interrelated with Panda bond issues, that have become a viable option for international issuers to raise yuan funds in recent years and offering them the flexibility to choose between the two markets.
Dim sum bonds, which can bypass onshore regulations and tax implications, will probably still be the first stop for US and Hong Kong-based investors, according to Stratton Street.