CNH Tracker-New quotas rekindle debate over dim sum market's future

Wed Jan 15, 2014 11:19pm EST

By Saikat Chatterjee
    HONG KONG, Jan 16 (Reuters) - The future of Hong Kong's dim
sum bond market has dimmed with the rise of bond yields onshore,
tempting a growing number of foreign asset managers to look
toward the Chinese mainland.
    Concerns that the offshore yuan bond market will lose its
lustre resurfaced after Britain's Ashmore joined the ranks of
new Western asset managers able to invest directly in China as
Beijing tries to reform its capital markets. 
    Ashmore's investment quota last week follows on
from Beijing giving London-based asset managers the right to buy
up to 80 billion yuan ($13.23 billion) of assets last year.
Alliance Bernstein also got a quota to buy onshore debt
on Jan. 3.
    The weaknesses of the dim sum market are familiar. At around
400 billion yuan outstanding, the offshore market is a tiny
fraction of the size and the depth of the onshore market with
market yields on the mainland offering a juicy premium to its
cousins in Hong Kong.
    A five-year benchmark bond in Hong Kong offers a yield of
3.21 percent while a similar bond onshore offers 4.4 percent.
That gap in favour of the market on the mainland only widens if
investors compare it with the puny yields available in the
United States or Europe.
    As yields in the mainland have risen, China has stepped up
the pace of granting investment quotas to foreign institutions.
That has fanned fears that sophisticated investors will
increasingly bypass the dim sum market to buy onshore debt.
    China granted $450 million in fresh combined quotas to
licensed overseas institutional investors last month, according
to regulatory data bringing the total quotas awarded under the
Qualified Foreign Institutional Investor (QFII) programme to
$49.7 billion at end-December 2013. 
    While that pipeline of quotas is expected only to grow, the
primary drivers for the four-year old offshore yuan bond market
remain two familiar factors, namely: currency expectations and
the growth in offshore deposits.
    Yields in the offshore bond market still follow changing
perceptions of the currency's trends, a sign that it is yet to
become a mature market for measuring China credit risk despite
the strides taken by the dim sum market in recent months.
    That solid correlation has meant that a strong currency in
the opening months of the year has prompted a burst of issuance
from Chinese companies.
    The other source of support for the dim sum market is the
growth of offshore yuan deposits. While latest data show the
total amount of yuan deposits in Hong Kong have risen above the
800 billion yuan mark by the end of November, a recent paper by
a government advisory body has pointed to a worrying slowdown in
the growth of this deposit base.
    Renminbi deposits in Hong Kong grew only by a quarter to 730
billion yuan (excluding CD and interbank deposits), between
December 2011 to September 2013, compared with other offshore
markets which had increased by approximately 6.5 times to about
300 billion yuan over the same period, a recent Financial
Services and Development Council research paper said.
    That slowdown in growth of deposits is a worrying trend for
the dim sum market as excess funds are usually ploughed back
into bonds. But despite growing headwinds, debt bankers in Hong
Kong can take heart from what has happened in the equity sphere.
    Shanghai was long feared as a competitor for listings but
the Hong Kong Stock Exchange still remains the first port of
call for mainland companies looking to diversify their investor
base due to its strong and transparent regulatory framework.
    So, as the yuan makes more inroads into other financial
centers such as London and Singapore, prospective issuers will
weigh the risks and rewards of issuing bonds in these centers,
spreading the dim sum market's footprint geographically.
    Khiem Do, head of Asian multi-asset portfolios at Barings
Asset Management, said this week that demand for dim sum bonds
will remain high, particularly for high-yielding issues and from
investors without QFII access. 
    
    WEEK IN REVIEW:
    * The People's Bank of China will roll out detailed policies
to develop the Shanghai free trade zone in the first quarter and
material development is expected this year in the zone, said
Vice Mayor of Shanghai Tu Guangshao at a financial forum in Hong
Kong, who believed the yuan will become fully convertible in the
next 5 to 10 years.
    * Cross-border yuan loans in Shenzhen's Qianhai zone
amounted to more than 15 billion yuan last year and it would
hopefully exceed 50 billion yuan by the end of next year, said
He Zijun, deputy Director General, Authority of Qianhai
Shenzhen-Hong Kong Modern Service Industry Cooperation Zone of
Shenzhen.
    * Chinese asset management firm CSOP and London-based Source
announced the launch of the first renminbi qualified foreign
institutional investor (RQFII) exchange traded fund (ETF) listed
in London, expanding channels foreign investors access China's
domestic capital markets. [ID: nL3N0KK0ZW]

   CHART OF THE WEEK: 
   Yuan debt vs region:Offshore yuan bonds have stabilised after a recent roller
coaster ride following a money market squeeze onshore. While
yields have stabilised, in terms of performance, they still lag
regional counterparts, according to data from Thomson Reuters
Datastream
    
RECENT STORIES:
CNH Tracker- Chinese companies flock to offshore market for
fundsNew fund in London taps China onshore stock market
 
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