Reuters/Hong Kong


Foreign issuers are increasingly tapping the offshore yuan bond market, filling some of the gap left by the many Chinese names that have moved back to the mainland to raise funds more cheaply.
In the dim sum bond market, Korea Development Bank issued a 1.2bn yuan ($193.28mn) three-year bond at 4.1%, according to a term sheet seen by Reuters on Tuesday. It attracted orders from 55 accounts worth 2.4bn yuan.
Export Development Canada also completed its sale of a 2.5-year 800mn yuan bond at 3.53%. The AAA rated bond will be listed in Luxembourg.
While in Taiwan’s yuan bond market, Credit Agricole and Citi Group have both issued the so-called Formosa bonds. These issuances have injected fresh life into the overseas yuan debt market which has lost growth momentum as Chinese issuers switched to the onshore market to raise cheaper money. After China’s central bank cut interest rates four times since November and trimmed the amount of cash that banks must hold as reserves, the funding cost in the onshore bond market has become lower than offshore.
For example, a state-owned enterprise may need to pay more than 5% for a three-year yuan bond in Hong Kong. While in the mainland, the cost is 20-30 basis points (bps) lower, bankers estimate.
However, it has not affected foreign issuers who are attracted by elevated dollar/yuan cross currency swap (CCS) rates in Hong Kong that can help them reduce costs when converting proceeds from yuan to dollar. The higher the CCS rates, the more they can save.
“We have some European clients looking at the dim sum bond market now who plan to convert the yuan proceeds to euros,” said a DCM banker at a Chinese bank in Hong Kong.
Foreign issuers sold a total of 14bn yuan dim sum bonds in July, up 44% from June. It compared to 3.5bn yuan sold by China-Hong Kong companies, according to Bank of China International statistics.
The rush of issuance by foreign names came as China’s mainland stock market’s suffered a 30% drop, following a collapse in mid-June that subsequent official support measures halted without sparking a recovery.
“Investors’ appetite for dim sum bonds haven’t been affected by the stock market meltdown and our roadshows with them show that they care more about China’s economic fundamentals and issuers’ credit,” the DCM banker said. The return on dim sum bonds so far this year has outperformed other local currency bonds and dollar bonds from Asian issuers. HSBC last month raised its forecast for dim sum bonds’ total return this year to 4.5-5.5% from 3.2-3.7% (in RMB), saying the bonds were likely to put in a resilient performance throughout the year with the currency staying stable and the central bank pursuing an accommodative monetary policy.
Long positions in the yuan rose to the largest in a month thanks to the central bank’s consistent efforts to stabilise the currency, according to the survey of 20 fund managers and currency analysts conducted in late July.