CNH Tracker-Hedge fund Prudence hunts for yuan bond value

By Saikat Chatterjee

HONG KONG, Sept 29 (Reuters) - A selloff in the offshore
yuan market sparked by a retreat from Asian currencies and bonds
has left most investors nursing their losses, but Mason Wu at
Prudence Investment Management is quietly using this opportunity
to buy quality names.

Wu, who helps manage $300 million in assets at an offshore
yuan bond long-only fund and a hedge fund investing in Chinese
credit, said the recent selloff is a rare opportunity to find
value in assets thrown out in haste.

Wu leverages his team's investment expertise on the Chinese
credit market to invest in the dim sum bond market and stays
away from companies whose structures are difficult to understand
or where governance issues are a concern.

His bullishness on the offshore yuan market has not changed
despite a shakeout of bets on the currency.

"We believe the underlying fundamentals of this market is
rock-solid and this will be the G4 market of the future," Wu
said, referring to the rise of the yuan in international capital
markets as a financing currency after dollars, euros and yen.

The current bout of selling would also make both issuers and
investors adopt a more disciplined approach when it comes to
raising bonds or buying them in the future rather than blindly
betting on yuan appreciation, he said in an interview.

Bond traders said the underperformance was concentrated in
the high yield sector with some of the property companies seeing
prices on their bonds marked down by as much as 10-15 points. A
gauge for measuring dim sum performance has lost
more than three points in less than a month.

The spread between offshore and the onshore yuan widened to
its highest levels since the offshore market began last July as
investors fled to safe-haven assets like gold and the U.S. debt.

To be sure, dim sum bonds of Chinese names have been less
battered than their dollar bond market counterparts where prices
on some property names have dropped by even more and the
weakness in offshore yuan has been lesser than the
Indonesian rupiah and the Korean won .

Wu, at any other time since Prudence launched its hedge fund
and long-only fund in 2009 and 2011 respectively, did not want
to provide specific details on where he is finding value.

"We don't look at credit ratings, we do our homework and we
take a long term view on this market. So when such an
opportunity comes along, we grab it," Wu said.

WEEK IN REVIEW:

* The offshore non-deliverable forwards market in yuan is
losing ground to the CNH market, although it is unlikely to
disappear completely until the yuan becomes fully convertible,
according to Michael Poon, managing director at Tradition (Asia)
. Daily CNH turnover including forwards is about $4.5
billion, roughly equivalent to the NDF markets.

* Shanghai is planning to set up a yuan fund by raising
money from Chinese state-owned and private companies to lend
overseas, Fang Xinghai, director-general of the Shanghai
Financial Services Office, said at a conference in Shanghai this
week as reported by the Shanghai Securities News. A spoksman
said, however, the idea was at a very preliminary stage and was
contingent on central bank approvals.

* Loan me the money. Consumer finance company United Asia
Finance Ltd (UA Finance) has rolled out a $250
million-equivalent three-year syndicated financing in Hong Kong,
marking the second offshore yuan loan in this market.

* Two other potential dim sum loans -- the $820
million-equivalent three-year loan for Chinese developer C C
Land Holdings Ltd and a one billion yuan three-year loan for
Hong Kong-listed pharmaceutical firm United Laboratories
International Holdings Ltd -- have been in the pipeline since
July but have not been launched yet.

* Malaysia's Khazanah Nasional has been forced to
delay its dim sum debut due to the burst in market volatility.
Those close to the situation argued that Khazanah was looking to
establish a benchmark in the dim sum market and was not
desperate for funding. No formal guidance was released, although
the deal was whispered at the 2 percent area for three- and
five-year tenors. BOC International, CIMB Bank and RBS
are the leads on the offering.

CHART OF THE WEEK:

Bonds suffer in CNH selloff: link.reuters.com/xec24s

Yuan-denominated bonds took a beating as a rare discount
opened up between the CNH and the onshore yuan sparking a
selloff. A Deutsche Bank index of positioning indicators showed
the offshore community had the largest exposure to the yuan
prior to the selloff in emerging market currencies.

LEAGUE TABLES

YTD dim sum bond issuance:

Book runner: Proceeds (RMB mln): # of issues:

1. HSBC 29,355.0 57

2. Standard 16,156.3 35

Chartered Bank

3. Deutsche Bank 8,117.6 14

4. Bank of China 7,415.5 12

5. RBS 7,338.5 18

YTD synthetic RMB bond issuance:

Book runner: Proceeds (RMB mln): # of issues:

1. Deutsche Bank 4,679.2 4

2. Citi 2,912.5 2

3. Bank of America 2,312.5 1

Merrill Lynch

4. Bank of China 2,312.5 1

5. HSBC 1,248.5 2

* Thomson Reuters data as of September 29

RECENT STORIES:
CNH Tracker--Changing yuan views may take steam out of dim sum
bonds
BASIS POINT-UA Finance rolls out market's second Dim Sum loan

More stories about the CNH market
Daily onshore yuan reports
Daily China money market reports

Offshore yuan rate Onshore yuan rate
Offshore yuan dealt Onshore yuan on CFETS

THOMSON REUTERS SPEED GUIDES

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(Additional reporting by Nethelie Wong with IFR, Foster Wong at
BASIS POINT and Michelle Chen)