CNH Tracker-Dim sum market may regain strength on stable FX, less supply

Thu Apr 24, 2014 12:05am EDT

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By Michelle Chen
    HONG KONG, April 24 (Reuters) - Hong Kong's offshore yuan
bond market may gain in the second quarter after a loss-making
start this year as supply pressures ease and the Chinese
currency shows signs of stabilisation.
    The $110 billion so-called dim sum bond market was hard-hit
by a weakening currency and record-high issuance volumes during
January and March, posting a total loss of 2.1 percent in dollar
terms, according to HSBC.
    The market's sluggish performance was mainly due to a sharp
depreciation in the yuan, which was engineered by the central
bank to shake out speculative money that bet on one-way and
non-stop appreciation of the "redback".
    The yuan has fallen 3 percent against the dollar so far this
year, wiping out more than what it gained in 2013 and offseting
the returns from the rich interest payments dim sum bonds carry
compared with other bonds.
    Heavy issuance of dim sum bonds in the first quarter also
meant issuers had to offer attractive levels to entice buyers,
limiting room for yields to ease off. Fresh issuance amounted to
125 billion yuan ($20.04 billion), the highest quarterly level
on record, according to Thomson Reuters data.  
    However, analysts believe the yuan's weakness is drawing to
a close as long-term depreciation only dampens investor appetite
for yuan assets and could cause capital flight. That would go
against Beijing's aims to internationalise its currency. 
    "We expect a total return of 0.8 percent (in USD) for Q2
2014, assuming less increase in average yield and a currency
rebound after the RMB's worst quarter ever," said Crystal Zhao,
an analyst at HSBC.
    The median forecast in a Reuters poll of 30 analysts earlier
this month predicted the yuan could gain 1.3 percent,
2.7 percent and 3.5 percent, respectively, in three, six and 12
months.   
    The amount of dim sum bonds maturing in Q2 also offers
technical support for their performance in the quarter. A total
of 33 billion yuan bonds will come due in the next three months,
more than doubled the amount in Q1. 
    In addition, a two-year low CNH/USD cross currency swap
(CCS) curve looks appealing to foreign currency based investors
as their funding cost for yuan is now quite cheap due to ample
liquiditity.
    "CNH CCS has fallen to levels that make asset swap trade
attractive. Investors can borrow CNH via CCS, invest in CNH
products and when they mature, get back USD," said Frances
Cheung, a senior strategist at Credit Agricole.
    That said, threats from the onshore bond market which has
higher average yields and better liquidity are looming as China
hastens to open up its domestic interbank bond market to global
investors.
    China's central bank is considering opening a new channel
for foreign institutions to invest in the domestic bond market,
two sources told Reuters, potentially widening access to the
country's largely closed capital markets.    
    A five-year treasury bond in China traded with a
yield of 4.1 percent on Thursday, about one percentage point
higher than the one trading in the offshore market
.    
     
    WEEK IN REVIEW:   

    * Hong Kong Exchanges and Clearing Ltd plans to
begin trading copper, aluminium and zinc mini-futures contracts
this year and the contracts will be settled in cash with Chinese
renminbi, it said in a statement on Tuesday. 
    * China CITIC Bank International said on Tuesday it launched
a three-month RMB and AUD time deposit promotion with a
preferential uniform interest rate of 3.55 percent to meet
customers' demand for time deposit products.
    * China's central bank has signed an agreement to help its
Qatar counterpart invest in the Chinese interbank bond market,
the People's Bank of China said on Friday. Other foreign banks
which have the right to buy Chinese interbank bonds include
central banks in South Africa and Nepal. 
    * China's central bank and commercial banks purchased 189.2
billion yuan worth of foreign exchange on a net basis in March,
according to a Reuters calculation based on central bank data
released on Friday. 
     
   CHART OF THE WEEK: 
   Quarterly maturing amount of dim sum bonds in 2014: link.reuters.com/hah78v
        
   RECENT STORIES:
CNH Tracker-New cross-border investment scheme seen boosting
offshore yuan pool 
    
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  
       
($1 = 6.2375 Chinese Yuan)

 (Editing by Jacqueline Wong)
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