By Saikat Chatterjee
HONG KONG, June 20 Ripples from a worsening cash
squeeze in China's interbank money markets are reaching the
offshore yuan market and threaten to derail a recent surge of
bond sales as investors shun debt.
From January through May, average monthly sales of offshore
yuan bonds or dim sum debt were nearly 20 billion yuan ($3.26
billion). The pace dropped sharply in the first 20 days of June,
with sales of few than 7 billion yuan in bonds. Unless the pace
picks up, June will have the smallest sales since last August,
according to Thomson Reuters data.
Market participants expect conditions to deteriorate further
in the offshore yuan market before they get better.
An onshore fund shortage has caused bond auctions to fail
and sent interbank money rates spiraling up as smaller banks
have been forced to hunt for scarce funds.
A combination of seasonal factors such as banks'
end-of-quarter reporting and a crackdown on hot money inflows by
China's forex regulator in recent weeks have been cited as
Traders expect tight liquidity to last another few weeks but
to improve significantly from mid-July, after the seasonal
effects of the quarter-end fade and a large volume of maturing
PBOC bills and government bonds injects cash into the market.
"It is going to be a painful few weeks for the offshore yuan
market. In addition to the fund squeeze, the global environment
for fixed-income assets has also worsened noticeably in the past
few weeks," said a fund manager at an investment house in Hong
An HSBC index for measuring the performance of Asian local
currency bonds has dropped by 5 percent from a record peak in
The cash squeeze has sent interbank rates in the Hong Kong
market spiraling up to near record highs above 4 percent
from less than a percentage point a month ago.
As most banks and funds rely on the overnight money market
to fund their investments in CNH paper, analysts expect yields
on secondary market debt to start rising to reflect the higher
costs.As Asian local currency bonds have been dragged into a
spreading emerging market selloff in recent weeks, even CNH debt
hasn't been spared. An index for measuring CNH bond performance
has declined since a peak in early May. But given the relative
illiquidity of the market, it has fared better than a regional
index for these bonds.
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THOMSON REUTERS SPEED GUIDES