Financial centers slugging it out for piece of offshore yuan business

The historically wide cross-border rate gap will drive Chinese corporate issuers to seek funding in the offshore market, the report said. "We expect more issues, particularly certificates of deposit, to be easily refinanced."

Noting that the National Development and Reform Commission, China's top economic planner, had granted a quota of 75 billion yuan to State-owned entities to issue dim sum bonds, the bank said: "Quasi-sovereign names, including policy banks, are leading the way. They are likely to be followed by other State-owned banks."

As demand picks up, Chan said, the market is also likely to see long-maturity corporate bonds this year. However, that may lead to yields climbing.

"Longer duration bonds need to offer better returns to compete with US dollar bonds, because the US Treasury yield curve is very steep," she said.

The 10-year Treasury yield is about 3 percent. Adding in a credit spread of 2 percentage points, the yield will be 5 percent.

"For dim sum bonds, there is also currency risk. Besides, as the market is smaller, liquidity could be a problem. People would expect a decent yield pickup for long-term bonds. It depends on the quality of credit."

According to a report from UBS AG in December, global offshore yuan liquidity has leaped since cross-border trade settlement in the currency took off. Such liquidity rose from 60 million yuan in late 2009 to more than 1.2 trillion yuan by the end of 2013. Three-fourths of that capital remains in Hong Kong.

Despite its size, the offshore yuan market offers few investment channels other than dim sum bonds. Equity issues are few.

Hui Xian Real Estate Investment Trust Ltd, listed in 2011, was the first yuan-denominated stock issue in Hong Kong. In 2012, another Hong Kong-listed company, Hopewell Highway Infrastructure Ltd, issued yuan-denominated shares in the secondary market.

UBS said: "A shortage of (offshore yuan) bonds and other instruments relative to demand hinders both the efficient development of the dim sum bond market and (offshore yuan) liquidity growth."

That shortage also discourages turnover in the dim sum bond market, meaning the secondary market is illiquid, the bank said.

According to Nathan Chow, an economist at DBS Bank (HK) Ltd: "We expect 2014 to be a breakthrough year for offshore renminbi investment tools. There might not be yuan-denominated stocks, but we believe other products will see significant growth this year, especially investment vehicles such as equity-linked notes."