`Dim Sum' Debt Shows Yuan Opening Amid Hot Money Crackdown: China Credit

HSBC Holdings Plc and Standard Chartered Plc, the biggest foreign underwriters of yuan bonds sold in Hong Kong, say they have never been busier even as China seeks to curb inflows of capital to limit appreciation.

Justin Chan, HSBC’s deputy head of global markets in Asia Pacific, said the bank has organized 10 conferences outside China to promote use of the currency in world commerce and has “a very strong pipeline” of companies seeking to sell so- called dim sum bonds, yuan-denominated debt issued in the city. Sundeep Bhandari, Standard Chartered’s head of global markets in Northeast Asia, said the bank has done 25 similar events in 2010 and is advising a fund that plans to focus solely on the debt.

While Chinese regulators joined counterparts from Brazil to Thailand last week in tightening limits on inflows of funds, central bank Governor Zhou Xiaochuan said yesterday China will push ahead with exchange-rate reforms in the yuan. Issuers are paying 40 percent less to borrow in the currency in Hong Kong than they pay in Shanghai because of demand from overseas investors betting on exchange-rate appreciation.

“China still wants to develop the onshore market by opening it up in a controlled manner,” Chan at HSBC, Europe’s biggest lender, said in a Nov. 12 interview in Hong Kong. Last week’s measures, which included tighter rules on repatriating capital and borrowing overseas, were precautions “to prevent further hot-money flows into China,” he said.

Lifting Demand

The yuan may rise 6.2 percent to 6.26 per dollar by the end of next year, the most among the so-called BRIC nations that also include Brazil, Russia and India, according to a Bloomberg survey of 17 analysts. The median estimate is for a 1.3 percent gain in the Brazilian real, a 4.2 percent advance in the Indian rupee and a 5 percent climb in the Russian ruble.

HSBC’s Chan said he expects the currency to appreciate 3 percent to 5 percent annually in the next one or two years. He said the yuan may become one of the three major global currencies, with the dollar and the euro, in 20 to 30 years.

The yuan declined 0.16 percent to 6.6488 per dollar as of 1:25 p.m. in Shanghai. The offshore rate in Hong Kong of 6.6075 was 0.6 percent stronger than the onshore. The yuan’s non- deliverable forwards reflect bets the currency will advance 2.4 percent in the coming 12 months.

China is allowing greater use of its currency in global trade and investment to reduce reliance on the U.S. dollar, after Premier Wen Jiabao said in March he is “worried” about holdings of assets denominated in the greenback. Purchases of U.S. currency to contain yuan appreciation swelled the nation’s foreign-exchange reserves to $2.65 trillion in September.

Trade Settlement

The value of international trade transactions settled in the Chinese currency jumped 160 percent from the three months through June to 126.5 billion yuan ($19 billion) in the third quarter, the People’s Bank of China reported on Nov. 2. Yuan deposits at Hong Kong banks more than doubled to a record 149 billion yuan in the six months ended Sept. 30, Hong Kong Monetary Authority data show.

“Our clients want to know about the yuan,” Standard Chartered’s Bhandari said in a Nov. 12 interview in Hong Kong. “I will fly back from London at 5 p.m. on Wednesday and get a Thursday morning flight to Tokyo."

Bhandari declined to give details about the planned fund focused on yuan debt or name its manager. The dim sum bond market has grown 42 percent to 50 billion yuan since July 19, Royal Bank of Scotland Group Plc. said in a report on Nov. 15.

HSBC said it underwrote 11 issues of yuan-denominated debt instruments this year in Hong Kong, including dim sum bonds and certificates of deposit. Standard Chartered said it has been an underwriter on sales of totalling 8.4 billion yuan in 2010.

Planned Sales

Export-Import Bank of China plans to sell as much as 5 billion yuan of bonds in Hong Kong next month. International Finance Corp., the World Bank’s private investment arm, aims to sell about 100 million yuan of five-year bonds in Hong Kong, according to Treasurer Nina Shapiro.

‘‘We like buying offshore renminbi bonds because the regulations are not as tedious,’’ said Chia Tse Chern, director at UOB Asset Management, which oversees the equivalent of $10.6 billion and is a unit of Singapore’s second-largest bank. ‘‘They want to develop the renminbi bond market and possibly don’t want more capital flows into the mainland. So they are allowing the market to be developed out of Hong Kong.”

Attractive Returns

Yuan appreciation plus interest-rate payments can translate into annual returns of as much as 7 percent, he said.

The average yield of yuan bonds in the city, including those sold by state-controlled lenders including China Development Bank and Bank of China Ltd., is 1.77 percent, according to data from the Treasury Markets Association, which tracks 23 outstanding issues that have maturities of no more than four years. The average rate in China for one- to three- year bonds issued by government-linked companies is 2.99 percent, according to Bank of America Merrill Lynch’s China Quasi-Government Index.

The yield on China’s 3.28 percent government bond due in August 2020 was little changed at 3.74 percent, according to the National Interbank Funding Center. The extra yield investors demand to hold China’s 10-year bonds rather than similar- maturity U.S. government debt has widened 63 basis points since June 30 to 101, according to data compiled by Bloomberg.

Bond Risk

The perceived risk of investing in Chinese debt has fallen this year. Five-year credit-default swap contracts on government bonds rose two basis points to 63 basis points yesterday, CMA prices in New York show. They have declined 11 basis points this year. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.

HSBC’s Chan said China won’t slow the opening up of its financial market because it wants to make the yuan an international currency. The central bank allowed overseas financial institutions on Aug. 17 to invest yuan funds in the nation’s bond market. The Hong Kong units of HSBC and Standard Chartered won the approval last month.

China had approved qualified foreign institutional investors to buy $18.97 billion of assets in China by Sept. 30, up from $16.67 billion of quotas at the end of last year, according to a statement on SAFE’s website on Nov. 10. The authorities granted the Hong Kong Monetary Authority a QFII license in October.

Charles Li, the chief executive officer of Hong Kong Exchanges & Clearing Ltd., has proposed allowing Chinese companies to sell yuan-priced stock in Hong Kong, where investors are free from the quotas imposed by Beijing on foreign ownership of mainland equities.

“If you want big demand for yuan offshore, you need to create channels for offshore yuan funds to be invested,” said Chan. “This will by and large help open the door for capital- account movement.”

--Judy Chen. With assistance from Patricia Lui and Lilian Karunungan in Singapore and Shelley Smith in Hong Kong. Editors: Patrick Chu, Sandy Hendry

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at +86-21-6104-7047 or xchen45@bloomberg.net.

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

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