| HONG KONG
HONG KONG Aug 29 A big challenge to the dim sum
bond market is stagnant growth in yuan liquidity in Hong Kong,
as offshore funds flow back to China via pilot schemes targeted
to attract global investors.
Pressure will be especially heavy in September when the
fledgling market comes back from thin summer supply, possibly
with a 10 billion yuan ($1.63 billion) government bond, while
Beijing expedites the opening up of its financial markets.
The quota approved for the Renminbi Qualified Foreign
Institutional Investor (RQFII) programme that allows foreign
investors to put money in China's bonds and equities saw a 75
percent jump to 17 billion yuan in July from a month earlier.
Under this scheme, financial institutions who are eager to
flee emerging market volatility are able to find a place to make
investments with decent returns. In recent weeks, emerging
markets have reeled from hot money outflows due to an expected
winding down of U.S. Federal Reserve monetary stimulus.
Against this backdrop of Fed tapering and turbulence, the 25
trillion yuan onshore bond market looks appealing.
The 10-year treasury bond whose yield is hovering around a
two-year high, is offering a return of more than 4 percent, 500
basis points higher than dim sum government bonds with the same
"Expansion of the RQFII scheme is a real threat to the dim
sum bond market. When we had a meeting with Chinese regulators
some time ago, we suggested they pay attention to the offshore
yuan pool when granting new licences," said a banker in Hong
The dim sum bond market experienced a rare barren patch in
the past two months and is expected to see strong pipelines from
September. China's Ministry of Finance will also return to the
market to sell the second tranche of its 23 billion yuan bonds.
Hong Kong's yuan deposits fell in June, snapping eight
consecutive months of expansion to stand at 698 billion yuan. It
is expected to grow only mildly to 700-750 billion yuan by the
end of the year.
That compares with a 270 billion yuan quota for RQFII and
possibly another 100 billion yuan RQFII quota for Taiwan
That said, the good news is Chinese regulators are making
efforts to relax rules and make it easier for the yuan to flow
out of the world's second-largest economy.
The State Administration of Foreign Exchange (SAFE) said on
Tuesday that qualified domestic institutional investors (QDIIs)
can use whatever foreign currencies they want when investing
This means domestic investors will be able to transfer their
yuan funds abroad to make investments, which is actually the
launch of Renminbi QDII, the counterpart of RQFII that carries
opposite fund flows.
"It will increase the supply of RMB in Hong Kong and looking
forward, there should be more measures to encourage yuan
outflows," said Ngan Kim Man, Hang Seng Bank's Head of RMB
business strategy and planning department.
A Citigroup index measuring returns of offshore yuan bonds
in U.S. dollars have eked out meagre returns since June in
contrast to sharp falls in a Barclays index measuring returns of
Asian local currency government bonds.
WEEK IN REVIEW:
* The Hong Kong Monetary Authority (HKMA) said on Monday its
renminbi Real Time Gross Settlement system and Shenzhen
Financial Settlement System began a trial run of linkage in
January, allowing extension of operating hours of cross-border
renminbi payment services between Hong Kong and the mainland.
* In the first seven months, daily average transaction
processed during the extended settlement hours amounted to 4.5
billion yuan, which nearly doubled from the second half of last
year's daily average transaction of 2.6 billion yuan before the
launch of the new arrangement, the HKMA said.
* Luxembourg climbed to second place in the euro zone for RMB
payments in July which was mainly driven by financial transfers,
said global transaction services organisation SWIFT on Tuesday.
The RMB remained the 11th mostly used global currency in July
with a market share of 0.87 percent.
* China Asset Management (Hong Kong) listed its second
Renminbi Qualified Foreign Institutional Investor (RQFII)
A-share exchange traded fund (ETF) on the Hong Kong Stock
Exchange on Monday. The ETF tracks CES China
* Chinese asset manager E Fund Management (HK) launched its
RMB Mainland China Bond Fund last Thursday, investing in bonds
with a credit rating higher than BBB-. The fund has an RQFII
quota of 1 billion yuan and offers subscription and redemption
in RMB, HKD and USD.
* The HKMA and Bank Negara Malaysia (BNM) held a bilateral
meeting on Wednesday and decided that private-sector led
dialogues to discuss developments in RMB business would be
initiated to facilitate greater trade and investment activities.
CHART OF THE WEEK:
Yield spread between onshore and offshore government bonds
CNH Tracker-Yuan cross currency swap rates face downward
Dim Sum offers shelter from EM storm-IFR
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
Offshore yuan bonds
THOMSON REUTERS SPEED GUIDES
($1 = 6.1202 Chinese yuan)
(Reporting by Michelle Chen; Editing by Jacqueline Wong)