Bloomberg
Hong Kong


Hong Kong’s yuan bond market has ground to a halt as even average yields of almost 6% can’t allay global investor concerns over a weakening Chinese currency.
There have been no sales of Dim Sum debt maturing in more than a year since August 21, when Credit Agricole CIB raised 800mn yuan ($126mn), according to data compiled by Bloomberg. The average yield on the securities has jumped 160 basis points since an August 11 yuan devaluation to touch a record 5.97% on September 7, a Deutsche Bank index shows.
“The appetite for yuan-related instruments, including Dim Sum bonds, hasn’t fully recovered after the devaluation,” said Gordon Ip, a Hong Kong-based senior fund manager at Value Partners Group, which oversaw $16.5bn of assets at the end of July. “Even if an issuer wants to sell, it’s hard to get investors to buy. It’s probably a wait-and-see for investors on whether the yuan’s exchange rate is stabilising.”
The Dim Sum bond market is an essential part of China’s bid to boost the yuan’s role in global trade and international reserves because overseas investors’ access to onshore markets is still restricted. The devaluation and a switch to a more market-driven exchange rate sent the currency’s implied volatility surging six-fold, undermining the appeal of carry trades targeting higher-yielding yuan assets.
Buying the yuan with funds borrowed more cheaply elsewhere was one of the most reliable ways to make money earlier in the year as China held its currency at about 6.2 to the dollar from March until the devaluation. That has all changed, with the currency’s one-month implied volatility at 6.13% on Friday, up from 1.17% a month ago. This is negative for carry-trade transactions because it can wipe out the profit from any interest-rate differential.
The currency, known officially as the renminbi, has weakened 2.7% this quarter and is headed for the steepest loss since the government unified the market and official exchange rates in 1994.
“At one point after the devaluation, investors would just shake their heads when they heard the word ‘renminbi,’ ” said Carol Pang, vice president for fixed income, currency and commodities at Zhongtai International Holdings in Hong Kong. “Even people who used to bottom-fish in a sell-off didn’t take the opportunity. Although, in recent days, the yuan has shown signs of stabilization and we see some purchases.”
The offshore yuan, which declined an unprecedented 3.48% in August, has risen 0.7% so far in September.
China wants to avoid a currency war and is not looking to use yuan depreciation to boost exports, Premier Li Keqiang told the World Economic Forum in Dalian, China, last week. On Thursday, he signalled a further easing in capital controls, saying that global central banks can trade in the domestic foreign-exchange market. The People’s Bank of China has boosted the yuan’s daily reference rate by 0.3% since the end of August.
“Everyone is waiting for currency stability to return,” said Jason Ho, co-head of debt capital markets at ICBC International Holdings in Hong Kong. “Some Chinese companies find onshore funding costs lower than offshore which is also a factor in slowing offshore yuan bond issuance.”
The People’s Bank of China has cut interest rates five times since November and lowered the proportion of deposits banks have to set aside as reserves in an effort to cushion the economy’s slowdown. While consumer prices rose in August by the most in a year, lenders including Bank of America and Australia and New Zealand Banking Group expect further policy easing. “The direction of onshore rates is set to be lower as all the monetary policy moves have been to that end,” said Edmund Harriss, a London-based fund manager at Guinness Asset Management. “I expect yuan volatility in the offshore market to drop, yields to move back down and issuance to pick up.”
Sovereign yields have already fallen in response to PBoC easing. The yield on five-year government bonds in China, which has declined 32 basis points this year, was 29 basis points below similar notes in the offshore market on Thursday, according to Chinabond data and figures compiled by Bloomberg.
Corporate notes have been hit hardest by global market turmoil. As commodity prices slumped, the yield on trading company Noble Group’s three-year yuan notes due January 2016 jumped 820 basis points in the past month, the worst performance in Bank of America Co’s Dim Sum corporate bond index. The rate on Russian Agricultural Bank’s bonds due February 2016 rose 452 basis points in the second-worst showing. Yuan debt by state- owned banks are among the best.
Issuance of Dim Sum bonds, including certificates of deposit, has fallen 35% so far this year to 229bn yuan, according to data compiled by Bloomberg. Full-year sales are likely to be equivalent to only 60% of that of last year, according to Ben Yuen, Hong Kong-based head of fixed income at BOCHK Asset Management, which oversees about $8bn of assets.
“For now, the appetite is still not there,” said Yuen. “How stable the yuan will be in the next few months will be key to any improvement in the Dim Sum bond market.”