Yuan’s Hong Kong Discount Shrinks as Dim Sum Demand Picks Up: China Credit

The discount investors benefit from by buying yuan in Hong Kong is disappearing as China’s shift toward policies that support economic growth spurs demand for Dim Sum bonds.

The discount fell to 0.2 percent today from a record 1.9 percent on Sept. 23, according to data compiled by Bloomberg. The currency strengthened 0.5 percent this month in offshore trading after a 1.6 percent jump in October that was the biggest advance in a year. Yuan-denominated debt sold in Hong Kong rose in each of the last four weeks, the longest winning streak since May, according to the Deutsche Bank Offshore Renminbi Bond Index.

“As the China bears fade away, offshore yuan will soon return to a premium versus the onshore rate,” said Nathan Chow, a Hong Kong-based economist at DBS Bank (Hong Kong) Ltd., a unit of Singapore’s biggest lender. “China’s economy is fundamentally strong. Demand for yuan continues to outstrip supply in the offshore market.”

Premier Wen Jiabao said last month that policies will be “fine tuned” to protect Asia’s biggest economy against global turmoil, spurring speculation two years of monetary tightening will start to be unwound. The government has since announced tax cuts for companies as well as increased credit for smaller businesses, while the central bank lowered its one-year bill yield for the first time since 2008 and injected 163 billion yuan ($26 billion) of funds into the financial system.

Growth, Inflation

China will remain the biggest contributor to global economic growth next year amid a deepening debt crisis in the euro zone, according to Bank of America Corp. estimates. Gross domestic product will expand 8.6 percent in 2012, compared with 0.3 percent for the 17 nations that share the euro and 1.8 percent for the U.S., the Organization for Economic Cooperation and Development estimated last week.

Consumer prices rose 5.5 percent in October from a year earlier, the smallest increase in five months, the National Bureau of Statistics reported this week. Producer prices climbed 5 percent, less than the 5.8 percent advance predicted by economists surveyed by Bloomberg.

“With inflation easing lately, they have some room to use monetary policy to help the economy,” said Hitoshi Ueda, senior fund manager of the fixed-income investment group at Sumitomo Mitsui Asset Management Co. in Tokyo. “That is supportive of growth and will lead to a stable speed of yuan appreciation. We aim to benefit from that strengthening.”

Sumitomo Mitsui managed assets of about $130 billion at the end of August and Ueda said its holdings include Dim Sum bonds and China’s domestic debt.

Forecast Appreciation

The yuan gained 0.23 percent to 6.3550 per dollar as of 10:51 a.m. in Hong Kong, while the exchange rate in Shanghai rose 0.05 percent to 6.3428, according to data compiled by Bloomberg. The onshore rate has gained 0.19 percent this month after climbing 0.5 percent in October.

China has indicated a willingness “to let the appreciation continue in the months and years to come,” International Monetary Fund Managing Director Christine Lagarde said yesterday in Beijing, after meeting officials including People’s Bank of China Governor Zhou Xiaochuan and Vice Premier Wang Qishan.

The currency will climb 4.3 percent to 6.08 per dollar in Shanghai by the end of next year, according to the median estimate of 18 analysts surveyed by Bloomberg.

The average yield on Dim Sum bonds fell to 3.68 percent yesterday from a record 3.95 percent on Oct. 7, based on the Deutsche Bank Offshore Renminbi Bond Index.

Weaker Exports

The rally in the securities may slow as Europe’s debt crisis hurts exports, deterring policy makers from allowing yuan gains, said Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong. Overseas sales rose 15.9 percent in October from a year earlier, the least since February, trade data showed yesterday.

“Dim Sum bonds’ performance depends on investors’ expectations of yuan appreciation and as you can see the China exports numbers weren’t too great,” Cheung said. “Although China will still have relatively better growth, it can’t stand alone in this global storm.”

The yuan has gained 3.9 percent versus the dollar this year, the best performance among 25 emerging-market currencies tracked by Bloomberg. Brazil’s real weakened 5.8 percent, India’s rupee fell 11 percent and Russia’s ruble gained 0.1 percent.

Demand for yuan is picking up as China promotes the currency’s use in international trade and investment. Austria’s central bank signed a deal yesterday with the People’s Bank of China enabling it to make investments in the Chinese currency, while swap agreements totaling about 1 trillion yuan have been entered into with 14 economies including Hong Kong, Singapore, Indonesia and Argentina, according to data compiled by Bloomberg.

Attractive Valuations

The five-year credit-default swap protecting China’s sovereign debt fell six basis points to 143 yesterday, according to data provider CMA, which compiles prices quoted by dealers in the privately negotiated market. That compares with an Oct. 3 level of 201 that was the highest since March 2009.

Swaps contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Dim Sum bonds were little changed in the last four days, after advancing 1.25 percent in the previous four weeks, based on the Deutsche Bank Offshore Renminbi Bond Index. China’s economic growth will be above 9 percent this year, Chen Xiwen, director of the State Council’s Office of Central Rural Work Leading Group, said last week.

“Dim Sum bonds are attractive at current valuations as market fundamentals are intact,” said Becky Liu, a Hong Kong- based credit strategist at HSBC Holdings Plc, the top underwriter of Dim Sum bonds this year. Data suggests the economy is “better than expected and the government is willing to adopt micro fine-tuning measures,” she said.

To contact the reporters on this story: Andrea Wong in Taipei at awong268@bloomberg.net; Fion Li in Hong Kong at fli59@bloomberg.net

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

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