December 6, 2012 / 8:26 AM / in 5 years

CNH Tracker-Foreign investors pursue yuan products to bet on China recovery

By Michelle Chen
    HONG KONG, Dec 6 (Reuters) - Foreign investors are gaining
more confidence in yuan assets and flocking to offshore yuan
market to pursue exchange-traded funds (ETFs) and dim sum bonds,
banking on a recovery in China's economy and a turnaround in its
ailing stock markets.
    New ETFs denominated in the yuan, which were initially quiet
after their debuts on the Hong Kong Stock Exchange, saw daily
turnover rise over the week, especially in their Hong Kong
dollar trading counters. Their newly launched warrant products
were also actively traded.
    Take CSOP FTSE China A50 ETF  as an
example. The 23 warrants of the ETF posted turnover of HK$1
billion ($129 million) on their first trading day on Tuesday,
becoming the second most active warrant next to that of the
benchmark Hang Seng Index.
    The robust warrant trading also drove more funds to CSOP's
yuan-denominated ETF, which saw volume amounted to HK$325
million, ranking it third among all ETFs in Hong Kong and the
first among the four yuan ETFs in the market.    
    A warrant is a financial tool that enables its holder to buy
the underlying stock of the issuing company at a fixed exercise
price before it expires.     
    "Some investors are betting on a turnaround in the A-share
market as it has fallen quite a lot and they believe the room
for a further drop is limited," Ben Kwong, chief operating
officer at securities house KGI Asia, said.
    In his view, interest in the nascent yuan ETF market will
pick up further, especially after more issuers enter the market
with ETF and warrant products, given improved sentiment toward
China's economy. 
    The onshore A-share market tumbled to a four-year low in
November, and some analysts say it has hit the bottom, expecting
it to benefit from improved liquidity and economic reforms next
    CICC expects the A-share market to rebound 10-15 percent in
the first quarter next year, with a bigger bounce likely if
monetary policy is relaxed further.   
    With the yuan hitting record highs after a first-half lull,
the offshore yuan bond market has also regained traction since
November and the monthly issuance volume rose to about 15
billion yuan ($2.4 billion) from less than 10 billion yuan in
the previous three months, backed by both Chinese and foreign
    Chinese real estate firm Beijing Capital Land sold a
three-year dim sum bond priced at 7.6 percent last month. The
bond drew in huge demand from investors and was nine times
oversubscribed, which is rare in this market.
    "Global funds especially those from private banks are
starving for higher yields, and you can see how much they took
in Beijing Capital Land's deal," said a debt capital market
banker, referring to the 44 percent private banks contributed in
the 2 billion yuan bond.
    The Bank of China dim sum bond index, which
evaluates the overall performance of offshore yuan bonds, has
rebounded to 102.36 from a historic low of 93.99 seen in October
2011. The year-to-date return is 6.5 percent.
    The pace of activity in China's vast manufacturing sector
quickened for the first time in 13 months in November, a survey
of private factory managers found, adding to evidence that the
economy is reviving after seven quarters of slowing growth.
    China's economic growth may quicken to 8.2 percent in 2013
from an expected 7.7 percent this year in response to official
growth-promoting polices, but downside risk remains from global
uncertainties, the Chinese Academy of Social Sciences (CASS)
said on Wednesday.    
   * A cross-border repo scheme aimed at promoting the
internationalisation of the yuan has been used for the first
time. UBS London and HSBC's Hong Kong branch conducted the first
renminbi tri-party repo using Euroclear Bank and the Hong Kong
Monetary Authority as collateral management agents,
   * Daily turnover in Hong Kong's yuan settlement system, which
serves the global renminbi market, has surged as much as
two-thirds since June to reach 250 billion yuan per day, as
growing numbers of international banks and companies use the
Chinese currency. 
   * China Cinda Asset Management priced its 2 billion yuan
three-year dim sum bond at 4 percent, according to a term sheet
obtained by Reuters on Thursday. The bond, issued through
Bitronic Ltd, an indirect wholly owned subsidiary of Cinda, will
be listed in Hong Kong. 
   * Yuan deposits in Taiwan banks' offshore business units
(OBU) increased by 7.4 percent month-on-month to reach 19.3
billion yuan in October and yuan cross-border trade settlement
rose by 2.2 percent to 5.27 billion yuan, according to data
released by Taiwan central bank. 
   * China and South Korea agreed to use their $59 billion
currency swap agreement formed late last year to boost the use
of the yuan and won in bilateral trade, Seoul's finance ministry
and central bank said on Tuesday. Central banks of the two
countries will begin lending trading firms yuan and won through
banks from later this month. 
   * London performed strongly in October in Standard
Chartered's Renminbi Globalization Index, which is used to
evaluate the overall offshore yuan business worldwide, as yuan
trade settlements through London increased their contribution to
the index, while such payments through Hong Kong were flat.
    Bank of China Hong Kong dim sum bond index:
    Book runner:        Proceeds (RMB mln):       # of issues:  
    1. HSBC                39,860.8                    124     
    2. Standard            19,138.5                     74     
       Chartered Bank     
    3. BNP Paribas SA      15,811.3                     57     
    4. Bank of China       10,321.3                     15    
    5. Deutsche Bank        6,988.5                     27      
    YTD synthetic RMB bond issuance:       
    Book runner:         Proceeds (RMB mln):       # of issues: 
    1. Deutsche Bank       4,479.2                       3    
    2. Citi                2,912.5                       2    
    3. Bank of China       2,312.5                       1    
    4. Bank of America     2,312.5                       1     
       Merrill Lynch    
    5. HSBC                1,248.5                       2     
    * Thomson Reuters data as of Dec. 6. 
CNH Tracker-China hastening reforms as offshore yuan languishes
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 
($1 = 7.7500 Hong Kong dollars)
($1 = 6.2253 Chinese yuan)

 (Editing by Kim Coghill)
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