By Saikat Chatterjee and Nethelie Wong
HONG KONG, June 13 As the Chinese government
pulls the covers off yet another jumbo-sized offshore yuan bond
sale this year, a volatile debt market will sorely test investor
China's Ministry of Finance is set to offer 23 billion yuan
($3.75 billion) in dim sum bonds this year in two tranches,
according to government announcements. While the total quantity
on offer is in line with 2012 issuance, it comes as a surprise
to certain market participants who expected larger issuance
after last year's success.
About 13 billion yuan of an institutional tranche will be on
offer from June 26, with the rest coming in the second half of
The offering comprises 5 billion yuan in three-year bonds; 2
billion yuan in five-year bonds; 1 billion yuan in seven-year
bonds; 1 billion yuan in 10-year bonds; 500 million yuan in
15-year bonds and 500 million yuan in 30-year bonds. The other 3
billion yuan is slated for central banks and monetary
It is a foregone conclusion that the central-bank-focused
piece of the deal will be a success, given the relative scarcity
of credits for that market segment and in the longer maturity
buckets where there is a lack of issuance.
But what would be interesting to note is how shorter-dated
tranches fare as the broader Asian bond markets are buffeted by
a spreading selloff in emerging market assets.
While an index of offshore yuan bonds tracked by Citigroup
is down by nearly a point from mid-May highs, traders say the
index masks the true extent of the weakness in the dim sum bond
Some high-yield offshore yuan bonds are down by 4 percentage
points while investment grade debt has weakened by nearly 3
percentage points, a head of trading at an U.S. bank said. The
intensity of that selloff can be gauged from the fact that most
of these bonds are relatively short-dated instruments.
Moreover, an ongoing cash shortage in the offshore yuan
market, which usually has an inverse relationship with demand
for debt, is just starting to abate. Interest rates on overnight
yuan funds spiked to a near-record 4 percent in May before
subsiding to 2.5 percent this week.
Some bond market participants are unfazed and expect the
issuance to be a huge success.
"As this is a MOF issue, there will be plenty of support for
these bonds in the secondary market from the Chinese banks who
anyways hold the bulk of the CNH deposits," said a fund manager
at a bond fund.
A straw poll conducted by Reuters among five dealers expects
the three-year tranche to be priced at around 2 percent.
Existing MOF bonds for similar maturities trading in the
secondary market were yielding 2.2 percent.
In an encouraging sign, the ministry will offer more 15-year
and 30-year bonds this time, aiming to extend the benchmark
yield curve for renminbi securities in Hong Kong.
"It will increase the supply of long-term
renminbi-denominated fixed-income products for institutional
investors, including pension funds. This would be conducive to
the Government's objective to develop Hong Kong's bond market,"
said John Tsang, Financial Secretary of the Hong Kong Special
Administrative Region (HKSAR).
China's Ministry of Finance has sold offshore yuan bonds
every year since the yuan offshore market was founded in 2009.
WEEK IN REVIEW:
* In an encouraging sign from a product development
standpoint, Blackrock has launched Asia's first offshore RMB
bond index exchange traded fund. The ETF tracks the Citi RMB
bond capped index and requires that at least 70 percent of the
bonds be investment grade.
Blackrock is no stranger to the CNY products landscape.
ishares introduced the world's first A-Share ETF, iShares A50
(2823) in 2004,and today it is the largest and most liquid
A-share ETF in the market, totalling 54 billion Hong Kong
dollars ($6.95 billion) in assets with turnover of 2 billion
Hong Kong dollars in average daily trades.
* Harvest Global Investments Limited launched an MSCI China
ETF offering investors access to the 50 biggest constituents of
the China A-shares index based on domestic free float-adjusted
market capitalization. "With growing interest in China A-Shares,
investors are seeking more targeted investment options," said
Dr. Henry Zhao, Chairman of HGI.
* In the deal space, United Overseas Bank has priced its
first Singapore-cleared dim sum bond at a 2.6 percent yield. The
500 million RMB three-year deal garnered hefty demand with more
than 26 accounts putting in more than 1 billion RMB of orders.
Investors in Singapore took 52 percent of the deal, followed by
Hong Kong at 45 percent and Europe at 3 percent. UOB follows in
the footsteps of DBS, HSBC and Standard Chartered which launched
dim sum bonds in the city state recently.
CHART OF THE WEEK:
Yuan deposits in HK:After a period of stagnation in 2012, yuan deposits have
started to grow again. Yuan deposits as a percentage of total
deposits have grown to more than 10 percent of the total Hong
Kong deposit base. Total yuan deposits are inching towards the
700 billion yuan mark, according to latest data at end-April.
CNH Tracker-Dim sum bond rivalry could hurt market evolution
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