FACTBOX-Offshore yuan market has heavy demand for small supply

HONG KONG, Jan 13 (Reuters) - China's rapidly growing
offshore yuan market is garnering global attention, the result of
heavy demand for a currency expected to steadily appreciate and
spread in use around the world.

Beijing's promotion of Hong Kong as an offshore trading hub
has led to companies lining up to issue yuan-denominated bonds,
banks creating new structured products and more Chinese importers
settling trade in renminbi.

Yuan deposits in Hong Kong grew nearly 30 percent from
October to November to 280 billion yuan, dwarfing the roughly 60
billion of outstanding dim-sum bonds, a trend that is expected to
continue to underscore the supply and demand mismatch.

Yuan shares listed in Hong Kong may be right around the
corner in 2011, with Cheung Kong (Holdings) Ltd's (0001.HK) REIT
expected to be the first IPO outside of China to be denominated
in yuan.

Below are a few products banks have launched and some of the
major developments in this fast-growing market.
MAJOR PRODUCTS AND DEVELOPMENTS
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Date Issuer Product
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2010 HSBC (China) Swaption with BNP
Nov (0005.HK)(HSBA.L) Paribas (BNPP.PA)
The swaption gives investors holding yuan fixed-income assets the
option to pay a fixed-rate swap if they expect interest rates to
rise and protect the value of their portfolios.
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2010 HSBC (China) Interest rate swap
Oct (0005.HK)(HSBA.L) with Deutsche Bank AG DBGKn.DE
The product enables investors to manage interest rate risk, so a
buyer of a yuan-denominated bond may want to swap fixed for
floating rates because they expect China to keep raising interest
rates to fight inflation.
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2010 Thomson Reuters Offshore yuan prices
Sept EBS
Both Thomson Reuters Corp (TRI.N) (TRI.TO) and EBS, which is
owned by ICAP Plc (IAP.L), the world's biggest interdealer
broker, launched offshore yuan trading on their rival foreign
exchange matching platforms, greatly enhancing market
accessibility.
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2010 Deliverable forwards
Aug-Sept
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A yuan deliverable forward curve has also developed with average
daily volumes of $200-500 million, offering companies who hold
yuan a way to hedge their future yuan payables via this market
rather than the offshore dollar/yuan non-deliverable forward
market.
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2010 Yuan-linked structured deposits
July
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HSBC Holdings Plc (0005.HK)(HSBA.L) and Standard Chartered Plc
(STAN.L)(2888.HK) were among the first to launch yuan-linked
deposit products after the authorities relaxed rules on yuan use
in Hong Kong. These deposits offer investors higher rates than
the virtually zero rates on Hong Kong dollar deposits and the
opportunity to benefit from yuan appreciation.
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SIGNIFICANT BOND ISSUES
Outstanding yuan-denominated bonds in Hong Kong, or dim-sum bonds
as they are known, amount roughly to 60 billion yuan with a
distribution ratio of one third towards retail investors and the
remainder to institutional buyers, Deutsche Bank said.
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Date Issuer Amount Coupon Maturity Origin
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2010 World Bank (IBRD) 500 mln 0.95% 2-yrs NA
Jan yuan
The issue set a new low for dim-sum bond yields and came at a
time when China's stake in the World Bank is about to increase.
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2010 Shui On Land 3 bln 6.88% 2-yrs HK
Dec (0272.HK) yuan
The property company set a trend with its yuan bond that would be
settled in U.S. dollars. This kind of synthetic issue draws in a
wider array of investors.
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2010 China 8 bln 1%-2.48% 2- China
Nov yuan 10-yrs
China's second sovereign issue from the offshore market
essentially formed a yield curve off which future corporate
borrowers could price their bonds.
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2010 Caterpillar Inc 1 bln 2% 2-yrs U.S.
Nov (CAT.N) yuan
The second blue-chip U.S. name to sell yuan bonds could herald
more companies that do business in China raising funds here.
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2010 Asian Development 1.2 bln 2.85% 10-yrs NA
Oct Bank yuan
The longest maturing offshore yuan bond met with heavy demand and
signalled that the market was gaining sufficient depth for tenors
beyond five years.
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2010 McDonald's Corp 200 mln 3.0% 3-yrs U.S.
Aug (MCD.N) yuan
This issuance was the first "dim-sum" bond from a multinational
company in the territory and afforded the burgeoning market
international status.
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2010 Hopewell Highway 1.38 bln 2.98% 2-yrs HK
July Infrastructure yuan

Ltd (0737.HK)
Hopewell was the first non-financial company to sell a yuan bond
in Hong Kong. It had to expand the offering because of strong
demand.
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(Editing by Chris Lewis)