HONG KONG, July 31 The supply of yuan bonds in China's offshore market is expected to remain robust in the coming months as issuers take advantage of cheaper financing costs to roll over maturing debt even amid concerns over a volatile currency and a slowing economy.
The healthy pipeline of debt comes on top of a record issuance in the half-year ending June 30, which saw a record 350 billion yuan ($56.63 billion) of bond sales, close to the full-year total in 2013, according to Thomson Reuters data.
Market watchers say the heavy issuance only offsets a chunk of the maturing so-called "dim sum" debt this year with a total of 48 billion yuan bonds remaining to be refinanced by the end of the year, according to estimates by HSBC analysts.
"Besides frequent issuers, we also expect debut companies backed by first-tier provincial or city governments to come in the following months, such as domestic ratings of AA+," said Crystal Zhao, a fixed income analyst at HSBC.
The $120 billion and growing dim sum market saw the first bond issuance from China's local government financing vehicle (LGFV) and the first bond backed by a standby facility of credit line from a bank in the past month.
Beijing Infrastructure Investment, wholly owned by the Beijing municipality and with a rating of A+/A1/A+, sold a three-year dim sum bond at 3.75 percent, the second-lowest coupon this year from China state-owned companies.
China's provincial government controlled Sichuan Development also completed the sale of a 1 billion yuan dim sum offering with the support of a standby loan last week.
Though the dim sum market is yet to see a real default, negative news about China's onshore bond market has kept foreign investors alert to potential risks these Chinese names carry. And higher-quality debt issues will be more highly sought after.
"Caution over China's credit events in H2 suggests issuance by IG (investment grade) names is likely to be well bid," said Liu Linan, a strategist at Deutsche Bank in Hong Kong.
In fact, among the new issues of rated bonds in the first half of the year, investment-grade accounted for the majority, reversing the situation in 2013, as investors shunned risky names in the backdrop of defaults and a slowdown in the property market in China.
Chinese construction company Huatong Road & Bridge Group avoided a bond default at the last minute last Wednesday. The case came after the country's first public bond default in March, when Shanghai Chaori Solar Energy Science and Technology failed to make interest payments on a bond.
Yang Xi, an analyst at China Citic Securities in Beijing, suggested buying into policy bank bonds with tenors of 3-5 years. While for credit products, Yang favoured non-rated debt sold by state-owned companies and property issues with a rating of BB or above.
WEEK IN REVIEW:
* South Korea's yuan payments value in June rose more than six-fold from a year earlier, taking it to eighth position in the world for yuan payments excluding China and Hong Kong, global transaction services organisation SWIFT said on Tuesday.
* U.S. money manager Van Eck Global partnered with China Asset Management (Hong Kong) to launch an exchange-traded fund (ETF) tracking a China A-Shares index and the ChiNext board focusing on small- and medium-sized enterprises (SME).
* The Qianhai Bay economic zone in the southern Chinese city of Shenzhen is to auction four parcels of land next month, the second auction this year, to draw more e-commerce and trade-related companies to the hub.
* With the Hong Kong-Shanghai trade connect scheme linking both the city's stock markets set to become a reality by the four quarter of 2014, investors are wasting no time to position themselves. Large capital inflows have pressured the Hong Kong dollar higher while some analysts are busy upgrading exchange and brokerage stocks.
CHART OF THE WEEK:
Growing dim sum bond issuance: link.reuters.com/zam52w
In the space of four years, China's offshore yuan bond market has gone from virtually zero to one of the biggest local currency bond markets in Asia. It is now beginning to rival the Singapore and the Hong Kong dollar bond markets both of which have been around for decades.
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($1 = 6.1800 Chinese yuan) (Editing by Saikat Chatterjee and Jacqueline Wong)