The ‘dim sum’ bond market is starting to show a pulse after expectations for swings in China’s currency dropped the most among major currencies this month.
Sales of yuan debt offshore have surged to 26.4bn yuan ($4.08bn) in March, more than double January and February’s combined 12bn yuan, data compiled by Bloomberg show. The debt returned 1.7% since the end of January, after losing 1.2% in the previous two months, according to the BOCHK Offshore RMB Bond Index. Three-month implied volatility fell to 6.4% from 8.3% on February 29, the biggest decline among 31 major currencies.
After an August yuan devaluation that shocked global markets, the People’s Bank of China has sought to curb capital outflows and intervened to stabilise the exchange rate.
National Australia Bank and Goldman Sachs Group were among foreign lenders to test the waters, while China’s finance ministry and Hungary’s government are preparing offshore yuan debt sales. PBoC deputy governor Yi Gang said on March 12 that the authorities plan to support the development of the market.
“I do expect that the worst part of the currency uncertainty is behind us, but I’m also realistic that there is still concern about potential depreciation, which might keep yields from going down too much in the offshore market,” said Rajeev De Mello, who oversees about $10bn as head of Asian fixed income at Schroder Investment Management in Singapore. “The higher yields, compared with the US and many other countries, are going to be an attraction.”
While the average yield on offshore yuan bonds climbed to a record 6.18% on January 28 - compared with 1.03% on three-year Treasuries - investors were reluctant to pile into the debt amid turmoil in the yuan and local stocks. Sentiment is slowly turning, with the yuan erasing its losses for the year and officials trying to soothe frayed nerves.
PBoC deputy governor Yi Gang said in a press conference on March 12 that the yuan’s internationalisation and the development of the offshore market are driven by market forces.
Policy makers have gone to extreme lengths to prop up the yuan - ramping up intervention, clamping down on capital outflows and waging a rare verbal campaign to restore confidence in the currency.
Global sovereign issuers are lending a hand. China’s Ministry of Finance is said to have chosen London to issue the first yuan-denominated bonds outside of Hong Kong and the mainland, following the PBOC’s sale of 5bn yuan of one- year bills in October. The Hungarian government is primarily looking at selling yuan bonds outside China.
The yuan traded in Hong Kong has risen 1.3% so far this year, while the onshore rate has advanced 0.1%. Both fell to five-year lows in January as the PBoC sought to punish speculators trying to take advantage of the difference in the two rates. Yuan deposits in Hong Kong, the biggest offshore pool, shrank 15% last year in their first annual drop, before rising 0.1% in January to 852bn yuan, according to the Hong Kong Monetary Authority.
“Given the shrinking pool following the depreciation, it was impossible for the Dim Sum market to not feel the spillover effects,” said Yang Xi, a Beijing-based analyst at Citic Securities Co, China’s biggest broker. “Now that the currency is stabilising, we still think there are plenty of opportunities as the yuan’s globalisation push is still on the top leadership’s agenda.”
Twelve-month forwards for the offshore yuan have rallied 1.7% so far this month in Hong Kong, outperforming the exchange rate’s 1.2% gain, data compiled by Bloomberg show. The one-year cross-currency swap rate, a leading indicator for offshore yuan bond yields, fell to 3.03% from a record 6.2% on January 18.
“More stability is returning to the Chinese currency and swap rates have come down very sharply,” Schroders’ De Mello said in a March 16 phone interview. “That’s really among the main reasons for the much, much better performance of dim sum bonds recently.”
Certificate of deposit issuance accounted for most of the offshore salesin March. HSBC Holdings, the top underwriter for such debt in the last five years, forecast in December that gross sales including CDs this year will extend a decline to 260bn yuan-300bn yuan from last year’s 423bn yuan.
Sales of yuan-denominated debt excluding certificates of deposit fell 32% to 163bn yuan in 2015, the first decline since the market’s inception in 2007, according to data compiled by Bloomberg. Issuance in the first quarter was about a third of the amount of a year earlier at 12.1bn yuan, largely because Chinese companies can get cheaper funding in Shanghai.
Commonwealth Bank of Australia issued 150mn yuan of three-year debt at a coupon rate of 5.095% earlier this month, while Goldman Sachs Group sold two-year notes at 5.23%.
“As the currency market stabilises, dim sum is clawing back lost ground, albeit slowly,” said Raymond Gui, a Hong Kong-based senior portfolio manager at Income Partners Asset Management, which oversees $1.7bn. “For issuers, if the cost keeps falling, it will reach a level that will lure more sales.”