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* China finance ministry sells 16 bln yuan dim sum bonds
* 7 bln yuan of 3-year bonds at 2.53 pct was largest tranche
* Ample liquidity, low funding costs boost demand
By Michelle Chen
HONG KONG, May 21 (Reuters) - China completed the sale of 16 billion yuan ($2.56 billion) in dim sum bonds on Wednesday, drawing strong demand from institutional investors seeking to diversify investment portfolios despite the weakness of the Chinese currency.
China's economy has shown broad weakness in April and the yuan has wiped out all its gains against the dollar last year, but investor appetite for highly-rated debt remains intact.
Bonds of various tenors were offered, but the largest amount sold was 7 billion yuan of three-year bonds at 2.53 percent, the Ministry of Finance said on its website, in line with expectations and lower than a previous auction last year.
The rest of the sale included 4 billion yuan of five-year bonds at 3.25 percent, 1 billion yuan of both seven-year and 10-year bonds at 3.8 percent and 4 percent, respectively, and 500 million yuan of 15-year and 20-year bonds at 4.29 percent and 4.5 percent.
Another 2 billion yuan was allocated to seven central banks and regional monetary authorities, comprising 1.4 billion yuan of three-year tenor, 400 million five-year tenor and 200 million yuan seven-year tenor bonds.
The coupon rates for central banks were the same as the institutional tranche.
"These are largely within the ranges of expectations," said Frances Cheung, a senior strategist at Credit Agricole. "We see continued demand for these papers due to needs for investment diversification, including reserves diversification."
The 14 billion yuan institutional tranche was auctioned via the Hong Kong Monetary Authority's Central Moneymarkets Unit (CMU), which showed the total order book of the bonds reached 40.9 billion yuan.
Demand for the three-year tenor was especially strong where the application amount was more than three times of the issue size.
The success of the sale was also due to ample liquidity in the offshore market and low funding costs for foreign investors to obtain the Chinese currency via cross currency swaps.
Hong Kong's yuan deposits rose to 945 billion yuan by the end of March, up 4 percent from a year earlier. Together with the yuan deposits in Taiwan, Singapore, London and South Korea, the overall offshore pool amounted to 1.5 trillion yuan.
The Ministry of Finance (MOF) is the biggest and most prolific player in the primary market of dim sum bonds and its bond sales are a much awaited event among investors as it sets the tone for other issuers.
The MOF will issue a total of 28 billion yuan in offshore yuan bonds this year, the highest level since it first tapped the dim sum market. This year's sales will make its issuance since 2009 top 108 billion yuan.
Bank of Communications Hong Kong branch is the issuing, lodging and fiscal agent of the bond issue.
($1 = 6.2384 yuan) (Editing by Jacqueline Wong)