Appetite growing for dim sum bonds, say experts

Dim sum bonds, or offshore yuan bonds, will see increasing demand, experts said, thanks to lower financing costs in Hong Kong and tightening liquidity on the mainland.

The dim sum debt sold in the first quarter of this year came to 125 billion yuan ($20 billion), the highest quarterly figure on record, Reuters data showed. That compares with 53 billion yuan for the last quarter of 2013.

But the dim sum bonds in Hong Kong recorded a negative 2.11 percent rate of return in the first three months of 2014, HSBC reported. But the bank expects 0.8 percent gain in the second quarter.

"Currency is a key driver in this market," said Ivan Chung, vice-president and senior credit officer at Moody's Investors Service. He added that the outlook for China's economy as well as its government policies will also influence yield expectation and issuance volume.

Chung said that prevailing weakness in the yuan against the US dollar slowed bond issuance momentum in April, and possibly for the entire second quarter.

To curb the yuan carry trade, the People's Bank of China, the nation's central bank, has engineered a yuan depreciation in the past few months, with a higher daily reference rate. The PBOC broadened the daily floating band from 1 percent to 2 percent on March 17.

To date this year, the currency has lost 2.6 percent against the US dollar, losing almost all of its gains from the past year.

"If the weakness continues, it will inevitably dampen the issuance activities," he said. "Or the bond issuers need to pay a higher yield to attract investors' attention than in previous years."

Economists have voiced differing opinions on the valuation of the yuan, given its frequent fluctuations over the past few months.

Ginger Cheng, managing director for DBS Bank Hong Kong, predicted the yuan would reach six against the dollar by year's end, with short-term volatility.

Kelvin Lau, senior economist at Standard Chartered Bank, said the exchange rate will rise to 5.92 yuan per dollar by the middle of this year.

The peak of dim sum bonds coincided with investors' concerns over the yuan's further depreciation and possible defaults from Chinese issuers.

The default of onshore debt by Shanghai Chaori Solar Energy and Zhejiang Xingrun Real Estate exposed severe corporate leverage problems, and the situation grew more serious with tightening liquidity by the central bank.

The incidents undermined investors' confidence in high-yield dim sum bonds and pushed up the yields 15 basis points to 4.36 percent on average, according to HSBC's research.

Frankie Tai, associate director for Asian fixed income and cash portfolios for Invesco, a Hong Kong-based fund, said that these high-profile defaults have negatively affected investors' appetite for risk.

"We have seen new issuances mostly coming from banks and investment grade corporate bonds, rather than high-yield names," he said.

Tai said that a sharp slowdown of the Chinese economy could trigger a large-scale credit default.

"While this is not our worst-case assumption, we do expect there will be more cases of onshore defaults," he said.

Chung of Moody's said that the challenging environment and ongoing economic rebalancing will put more stress on weak Chinese issuers, particularly those in overcapacity industries with considerable debt to refinance.

Standard Chartered Bank expects the demand for dim sum bonds will remain steady in the coming months, with a growing offshore yuan pool in Hong Kong.

Up until the end of March, dim sum bonds and offshore renminbi certificates of deposit reached 692 billion yuan, rising by 24 percent from the end of 2013.

Chung said that for the whole year, issuance volume will continue to grow, with strong demand from policy banks and State banks.

"In the coming months, more new issuers will tap the dim sum bond market, due to continuing tighter credit onshore and lower borrowing costs offshore," said Chung.

linjingcd@chinadaily.com.cn