By Saikat Chatterjee
HONG KONG, May 16 Despite recent volatility in
the offshore yuan market, the demand for bonds denominated in
the Chinese currency is likely to remain strong as the yuan's
appreciation trend looks intact.
An HSBC index measuring total returns in the dim sum bond
market has gained more than 1.5 percent this year. That beats
returns in the Chinese onshore bond market by more than one
percentage point and is about even with how Hong Kong's
generally weak stock market has fared in 2013.
Since the start of April, returns on dim sum bonds have been
boosted by the Chinese currency's solid performance in the face
of a resurgent U.S. dollar even as other Asian currencies have
remained broadly flat. The yuan has appreciated more than 1
percent against the dollar since the end of March.
Market participants expect further yuan gains for two
One, recent regulatory moves to clamp down on hot money
flows being disguised as trade settlement have prompted analysts
to believe that Beijing is laying the groundwork to widen the
yuan's trading band soon, which may end up encouraging more
inflows into China from companies looking to hedge their
Two, the People's Bank of China has kept the trajectory of
the yuan's rise intact by fixing the daily midpoint stronger
than market forecasts amid recent weak data and some downgrades
of growth forecasts for the Chinese economy.
Prospects of more currency gains are encouraging investors
to snap up fresh issuances.
Chinese developer Yanlord Land Group this week sold an
offshore renminbi bond amounting to 2 billion yuan at a yield of
5.38 percent, below an initial price guidance of 5.5 percent.
It received orders worth more than 7 billion yuan, extending
a streak of heavy demand for new issues, particularly high yield
debt in the offshore yuan bond market.
That has encouraged overseas investors who are wary of
buying dim sum bonds directly to purchase U.S.
dollar-denominated bonds in Asia and the Middle East and swap
the exposure into the yuan via currency forwards.
One such investor is Stratton Street Capital, a London-based
fixed income fund, which is highly bullish on the yuan.
"The Chinese currency may not be as undervalued as earlier
but the fundamentals are strong and we expect it to gain 5-7
percent this year," Andy Seaman, Stratton's portfolio manager
While this forecast is "far more" than the consensus view of
1-2 percent yuan appreciation, which he said "can be quite wrong
when it comes to China."
In two years, Stratton's assets under management have grown
from less than $600 million to nearly $2 billion across its
fixed income products and managed accounts. Its renminbi bond
assets have increased from $47 million to $326 million.
"One of the reasons why we don't invest directly in the dim
sum space directly is the lack of rated paper and we don't like
high yield debt at this stage of the economic cycle and we find
better opportunities in the investment-grade space elsewhere,"
WEEK IN REVIEW:
* Yunnan-based Highland Capital Management aims to raise 5
billion yuan in the first round for a fund focused on investing
in companies in Southeast Asia that serve Chinese tourists and
work in energy and natural resources. Yuan-denominated outbound
direct investment by Chinese companies in 2012 was the
equivalent to $4.96 billion, compared with $77.2 billion in
total outbound foreign direct investment, according to central
* Three fund houses got approvals under the RMB Qualified
Foreign Institutional Investor (RQFII) quotas totaling 5 billion
yuan last week, suggesting that authorities are finally starting
to dish out more quotas. Two billion yuan each was awarded to
China Asset Management and CSOP Asset Management while E Fund
management received a 1 billion yuan quota.
* JP Morgan became the latest bank to execute a cross border
yuan transaction for a client after the company received a
cross-border lending quota. China's central bank has started
allowing a small number of foreign companies to lend their
excess yuan fund in the onshore market to fund their overseas
* Regulators simplified rules governing foreign direct
investment to boost market reform after Premier Li Keqiang
called on government agencies to cut red tape and cancel
unnecessary administrative approvals. China attracted $29.9
billion in foreign direct investment in the first three months
of 2013, up 1.4 percent from a year earlier.
CHART OF THE WEEK:
Chart on banks FX purchases:Chinese financial institutions net purchased nearly 300
billion yuan worth of foreign currency in April, up from March's
236 billion yuan, suggesting that capital inflows were robust
last month. FX purchases were greater than the sum of the trade
surplus and FDI inflows in April, though they are is likely to
drop in May due to the new regulations.
Weekly CNH Tracker:Chinese firm breaks ground with privately managed offshore yuan
Bullish yuan herd leaves China fundamentals in the
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