HONG KONG May 15 Volatility in the yuan this year has not deterred foreign companies from selling offshore bonds in the Chinese currency, due to heavy refinancing pressure and ample liquidity offshore.
Issuance of so-called dim sum bonds from foreign companies or financial institutions amounted to 13.3 billion yuan ($2.14 billion) from January to April, up 74.5 percent from a year earlier, according to Thomson Reuters statistics.
This was at a time when the yuan fell sharply against the dollar and wiped out all its gains recorded last year, which made some investors rethink their outlook for the Chinese currency and the risk of holding yuan assets.
The redback has lost a total of 3.3 percent of its value in the first four months as Beijing targetted speculative money that bet on one-way and non-stop yuan appreciation with the most sustained depreciation since its landmark revaluation in 2005.
Many of these bonds have come from frequent issuers in the dim sum market, including BP Capital Markets, Caterpillar Financial Services and Export-Import Bank of Korea, which will use the proceeds to refinance their soon-to-mature bonds or repatriate them back to China for projects there.
Operations and construction projects in China enable them to obtain renminbi revenues to repay dim sum coupons and principles when they mature, meaning no currency mismatch or FX risk on this front if they issue dim sum bonds.
Meanwhile, sufficient liquidity in the offshore yuan market and low cross currency swap rates have also well supported the huge supply in the primary market, keeping funding costs from rising too fast for issuers.
Cross currency swap (CCS) is a tool frequently used by both issuers and investors to swap yuan funds to dollars and vice versa. Low CCS rates are favorable to dollar-based investors as they can obtain cheap yuan funds with their dollars.
As the CCS rates are hovering near historically low levels, foreign issuers that tapped the dim sum market in the past few months mostly have real demand for yuan funds and do not swap them to other currencies.
"The CCS level is no longer economical for issuers to swap their renminbi proceeds to dollars. That's why none of them did so after January and foreign companies that do not need yuan funds disappeared in the dim sum market," said Becky Liu, a senior strategist at Standard Chartered Bank in Hong Kong.
This year, a record amount of dim sum debt is set to mature as most of these bonds are concentrated in short tenors of two or three years and broad-based issuers flocked to the market after 2010.
The amount of dim sum bonds issued from January to April has already reached almost 90 percent of the 186.9 billion yuan volume recorded for the whole of 2013.
China's Ministry of Finance (MOF) will start selling the first batch of its dim sum bonds worth 16 billion yuan next Wednesday, targetting foreign central banks, regional monetary authorities and institutional investors.
WEEK IN REVIEW:
* China will further loosen restrictions on foreign investment in the Shanghai Free Trade Zone. The "negative list" of sectors and activities banned to foreign investors is likely to shrink to about 130 items this year from the current 190, said Zhang Hong, director of the fiscal and financial section of the FTZ management commission.
* Yuan deposits at banks in South Korea rose by an equivalent $2.0 billion during April to hit a record $9.9 billion, official data showed on Monday, as investors continued to favour the yuan's higher interest rates.
* It is important that China moves towards a market-based exchange rate, U.S. Treasury Secretary Jack Lew said during a visit on Tuesday, adding that China should also ensure a level playing field for all companies.
* Bank of China completed the sale of its first offshore renminbi "Schengen bond" and listed it on the Luxembourg Stock Exchange, making it the first Chinese mainland company to issue renminbi bonds in the eurozone.
CHART OF THE WEEK:
Dim sum bond issuance keeps strong momentum: link.reuters.com/pev39v
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($1 = 6.2291 Chinese Yuan) (Editing by Jacqueline Wong)