Two men are silhouetted by a reflection from a HSBC logo in Hong Kong. The bank said new issues of yuan bonds may increase to a record 80 billion yuan next year. Jerome Favre / Bloomberg

HSBC Holdings Plc and Standard Chartered Plc, the biggest foreign underwriters of yuan bonds sold in Hong Kong, said Friday sales will double in 2011 as demand outstrips supply and the yuan appreciates.

New issues may increase to a record 80 billion yuan ($12 billion) next year, with as much as 30 billion yuan of sales in the first quarter, according to HSBC, the second biggest underwriter of so-called dim sum bonds. Standard Chartered, the fourth largest this year, says sales could top as much as 100 billion yuan as Moscow-based United Co Rusal and BP Plc plan issues. Offerings in 2010 total 40.7 billion yuan, data compiled by Bloomberg show.

"We're likely to see strong growth to around 80 billion yuan in 2011," Sean Henderson, HSBC's head of Asia debt syndicate, said in a telephone interview. The dim sum market has grown 10-fold since 2008 as China seeks to use the city as an international center to promote the use of the yuan beyond its borders for trade and finance.

Forecasts of currency gains spurred a 29 percent month-on-month jump in yuan deposits in Hong Kong to a high of 279.6 billion yuan in November, according to a statement from the Hong Kong Monetary Authority Thursday, creating an investor base seeking yuan-denominated securities. Bond issuers can save about 220 basis points, or 2.2 percentage point, in interest payments selling yuan bonds in Hong Kong rather than in Shanghai.

Dim sum bonds pay an average yield of about 1.6 percent, according to Treasury Markets Association (TMA) data, which tracks 30 outstanding issues including notes sold by China Development Bank Corp and Bank of China Ltd. The average yield paid on three- to five-year bonds sold by government-linked companies in China is 3.8 percent, according to Bank of America Merrill Lynch's China Quasi-Government Index.

Investment-grade companies in Asia pay an average 4.76 percent to sell dollar-denominated bonds, according to JPMorgan Chase & Co's Asia Credit Index.

China Development Bank's dim sum bonds due November 2013 yield 1.9 percent, according to TMA prices. The lender's dollar-denominated bonds due in October 2014 yield 2.82 percent, according to BNP Paribas prices, while its yuan bonds due October 2013 pay 3.7 percent, according to Chinabond prices.

Bank of China, the biggest underwriter of dim sum bonds this year, said this week it plans to set up an index tracking the performance of the most actively traded dim sum notes, according to an emailed statement from the bank on December 20. Nobody at Bank of China was able to provide a dim sum bond forecast Thursday, said Clarina Man, a spokeswoman.

Haitong Securities Co's Hong Kong unit set up a 5 billion yuan fixed-income fund in September that invests in offshore renminbi bonds.

"The pipeline for issuers is still pretty strong," Kong Weipeng, head of fixed-income investment at Haitong International Asset Management, said in an interview in Hong Kong on December 22. "A stable appreciation would be helpful for the development for the offshore yuan bond market. In the long run people expect the yuan to appreciate."

The yuan may rise as much as 6 percent next year against the dollar, Zhang Ming, the Beijing-based deputy chief of the International Finance Research Office of the state-backed Chinese Academy of Social Sciences, said in an interview this week. The median forecast of 21 analysts surveyed by Bloomberg is for a 5.9 percent advance to 6.28 yuan against the dollar by the end of next year.

China's currency is the best-performing among those of the so-called BRIC (Brazil, Russia, India, and China) economies over the past decade. The yuan has strengthened 25 percent against the US dollar in the past 10 years, outperforming gains of 15 percent by the Brazilian real, 3.4 percent in India's rupee and an 8.7 percent slide in the Russian ruble, according to data compiled by Bloomberg.

The yuan gained 0.11 percent to 6.6358 per dollar Friday in Shanghai, according to the China Foreign Exchange Trade System. Non-deliverable forwards show traders are betting on a 2.1 percent advance in the coming 12 months.

Rusal planned to hire banks to sell yuan-denominated bonds and conduct a sale as early as the first quarter of 2011, the company's head of capital markets Oleg Mukhamedshin said on December 17 in Moscow. A sale of 1 billion yuan would be a "reasonable" amount, he said.

BP, based in London, was considering selling bonds denominated in yuan, Gary Admans, the company's manager of debt capital markets, said at a conference in London on December 7. International Finance Corp (IFC), the World Bank's private investment arm, aims to offer about 100 million yuan of five-year notes, Nina Shapiro, IFC's Treasurer said October 20.

The Central Government and China Development Bank led issuance in the dim sum bond market this year, with 14.6 billion yuan of sales between them, according to data compiled by Bloomberg.

Macao-based casino operator Galaxy Entertainment Group Ltd sold the first speculative-grade dim sum bond this month. The 1.38 billion yuan of three-year bonds were priced to yield 4.625 percent.

VTB Group, Russia's second-largest bank, became the first company from an emerging market outside Asia to sell bonds denominated in yuan on December 10. The three-year bonds were priced to yield 2.95 percent, compared with a yield of 5.9 percent for VTB's five-year bonds in US dollars, according to Bloomberg data.

Elsewhere in China's credit markets, five-year credit-default swap contracts on the nation's bonds fell 0.5 basis point to 67.5 basis points Thursday, CMA prices show. The contracts rose 17 basis points in November after falling in October and September. Credit-default swaps typically decline as investor confidence improves and rise as it deteriorates.

The yield on the 3.67 percent government bond due October 2020 rose 3.5 basis points Thursday to 3.83 percent, Interbank Funding Center data show. One-year interest-rate swaps, the fixed cost needed to receive the floating seven-day repurchase rate, climbed eight basis points to 3.15 percent Thursday.

"The current imbalance between demand from investors and supply of bonds out there is such that we could lead to 100 billion yuan to 150 billion yuan of issuance," Daniel Mamadou, co-head of Asian capital markets and treasury solutions at Deutsche Bank AG, said in a telephone interview. "But all the market players have by now understood that this is going to be a process that is carefully observed and managed by both the People's Bank of China and the Hong Kong Monetary Authority."

Deutsche Bank, which helped arrange the first high-yield dim sum bond, is the seventh-largest underwriter.

HSBC's forecast for new issuance is achievable should regulators let borrowers repatriate proceeds and cross-currency swap markets develop further, Henderson said.

Bloomberg

(HK Edition 12/25/2010 page3)