HONG KONG: Decent yields and the need for portfolio diversification are driving many investors onto the yuan-bond bandwagon, as HSBC Bank (China) Co Ltd's latest RMB-bond issuance has proved a big hit.

The mainland arm of HSBC Holdings Plc, Europe's largest bank, said it received orders for a total of 4.4 billion yuan for its RMB bonds, representing an oversubscription that is 4.4 times the minimum issue size of 1 billion yuan.

The bank announced earlier that it would issue at least 1 billion yuan of two-year retail bonds, with an interest rate of 2.6 percent payable twice a year.

As a result, the bank has decided to fully utilize the granted quota and issue 2 billion yuan worth of bonds.

The retail tranche of 1.7 billion yuan attracted orders for 3.1 billion yuan worth of bonds from more than 27,500 individual investors, representing an oversubscription rate of 1.8 times the minimum.

The bank also booked orders worth 1.7 billion yuan for its institutional tranche of 300 million yuan worth of bonds, equivalent to an oversubscription multiple of 4.6.

"The success of our RMB-denominated bond issuance illustrated that Hong Kong investors have a positive outlook toward economic growth on the mainland.

It also signifies our investors' confidence in HSBC's continued expansion on the mainland," said Vincent Cheng, Chairman of HSBC Bank (China).

The bank said earlier that it planned to use the proceeds to further expand its business on the mainland.

However, analysts believe that a decent yield provided by yuan bonds in the current low-interest-rate environment and the investors' need for portfolio diversification amid uncertainties in the global economic outlook played a key role in investors' enthusiasm for yuan bonds.

"A 2.6 percent annual interest rate is quite OK for individual investors, considering the fact that banks on the mainland offer only about 2.8 percent interest for 2-year time deposits," said Daniel Chan, a senior investment strategist at DBS Bank.

It is impractical for individual investors in Hong Kong to place their money in mainland banks to receive slightly higher interest. So those who want to diversify their investment portfolio will find the yuan bonds attractive, he explained.

"The yuan bond yield is also reasonable when you consider the fact that China is unlikely to raise its interest rates aggressively in the foreseeable future," he said.

HSBC Bank (China) said it would allocate at least one RMB bond to each retail applicant. The bonds come in denominations of 10,000 yuan each.

In June, HSBC Bank (China) sold 1 billion yuan worth of bonds to institutional investors.

(HK Edition 09/08/2009 page4)