Dim Sum Busiest in 17 Months as BlackRock Bullish: China Credit

Dim Sum bond issuance has accelerated to the fastest pace since June 2012 as China’s pledge to move toward yuan convertibility boosts demand for the currency.

Sales reached 27 billion yuan ($4.4 billion) in November, almost five times as much as October’s 5.8 billion yuan, according to data compiled by Bloomberg. China Vanke Co., a developer held by billionaire Wang Shi, was among last month’s issuers, while Hong Kong Airlines Ltd. was considering an offering. The average yield on offshore yuan notes has declined 36 basis points to 3.96 percent this quarter, while the rate on Asian dollar debt has fallen 21 basis points, Bank of America Merrill Lynch indexes show.

Appetite for Dim Sum bonds has picked up with the People’s Bank of China outlining plans to end daily currency intervention and move toward renminbi convertibility, including allowing special accounts for trials in Shanghai’s free-trade zone. Yuan savings in Hong Kong rose the most since April 2011 to a record 782 billion yuan in October.

“It’s clear that China is determined to accelerate opening up its capital account, which means greater demand for the yuan in the global market,” said Steve Wang Wei, Hong Kong-based head of fixed-income research at BOCI Securities Ltd., a unit of China’s fourth-largest bank. “More issuers, such as Chinese private companies and overseas governments, will seize the chance to sell Dim Sum bonds.”

Vanke, Canada

Vanke priced 1 billion yuan of five-year bonds in the Chinese currency at 4.5 percent on Nov. 27, lower than a guidance within the area of 4.7 percent. The Canadian province of British Columbia raised 2.5 billion yuan in Dim Sum debt on Nov. 1, making it the first government other than China’s to tap the market, data compiled by Bloomberg show. The yield on the one-year notes was 2.17 percent yesterday.

Skyliner Company Ltd., a wholly-owned unit of Hong Kong Airlines, hired banks to arrange a series of fixed-income investor meetings in Hong Kong and Singapore starting Nov. 19, according to a person familiar with the matter.

November’s offerings, excluding certificates of deposit, were almost three times the 11-month average of 9.8 billion yuan and higher than the total 1.4 billion yuan in July and August. This year’s overall Dim Sum bond sales were 253 billion yuan as of yesterday. HSBC Holdings Plc., the top underwriter, estimates issuance will be as much as 360 billion yuan in 2013, up from last year’s 173 billion yuan.

Expiring Debt

“We expect new issuance for Dim Sum bonds in 2014 to surpass that of this year, spurred by bonds issued in 2009 to 2010 that require refinancing when they expire next year,” said Tee Choon Hong, Hong Kong-based global head of CNH capital market products at Standard Chartered Plc., the second-largest underwriter of Dim Sum securities. CNH is the trading code for the offshore yuan.

The PBOC will “basically” end normal intervention in the foreign-exchange market, broaden the yuan’s daily trading limit from the current 1 percent and enhance the currency’s two-way flexibility, Governor Zhou Xiaochuan wrote in a guidebook explaining decisions taken at a Nov. 9-12 Communist Party meeting.

Following the plenum, China’s leadership pledged to allow market forces a “decisive” role in the allocation of resources. That includes encouraging private investment in state-run businesses and allowing qualified private investors to set up small- to medium-sized banks.

“China’s domestic and offshore bond markets are expected to see sizable growth with expanding product variety,” BOCI’s Wang said in a phone interview yesterday. “the new reforms will open the market to more corporate issuers and investors, both at home and overseas.”

’Risk-On Mode’

China faces “relatively high” pressure from capital inflows because of loose monetary policy in the U.S. and Japan, as well as yuan appreciation expectations, PBOC Deputy Governor Yi Gang said in an interview with Caixin’s New Century magazine published yesterday. Yuan positions at China’s financial institutions accumulated from foreign-exchange sales, a barometer of capital inflows, climbed 442 billion yuan in October. The U.S. Federal Reserve kept its monthly asset purchases known as quantitative easing at $85 billion at its late October meeting, boosting fund flows to emerging markets.

“The general bond market, be it the Dim Sum bond or dollar market, has staged a very strong comeback since late September,” said Standard Chartered’s Tee. “It’s a result of clearer market understanding of QE tapering. Since then, market momentum resumed, sending investors into a risk-on mode.”

Banking Risks

China’s borrowing costs are climbing at the fastest pace since late 2010 as the authorities look to liberalize interest and exchange rates. The benchmark 10-year yield jumped 49 basis points this quarter and 48 basis points in the three months through September, the biggest increases since a 57 basis point gain in the final three months of 2010, a ChinaBond gauge shows. The premium over similar maturity U.S. Treasuries widened to 169 basis points yesterday, from 139 on Sept. 30.

One or two small Chinese banks may fail next year as they face pressure from their reliance on short-term borrowing, Fang Xinghai, a bureau director at the Central Leading Group for Financial and Economic Affairs, said at a Nov. 20 conference in Beijing. His warning follows efforts by Premier Li Keqiang to stem a $6.6 trillion credit binge from the past five years.

In BlackRock’s Favor

Analysts raised their forecasts for the yuan as economic data beat estimates. Manufacturing growth beat analysts’ forecasts in November, with the Purchasing Managers’ Index at 51.4, the same as the 18-month high reached in October. A number above 50 signals expansion.

The currency will reach 6 per dollar by the end of 2014, according to a Bloomberg survey of economists. That’s up from a forecast of 6.05 on Sept. 30. The onshore yuan, which has gained 2.3 percent this year, was little changed at 6.0925 per dollar in Shanghai today.

BlackRock Inc. favors the yuan because of China’s reforms and stabilizing growth, while preferring short-duration Dim Sum bonds, according to Joel Kim, head of Asia-Pacific fixed income at the company which managed $4.1 trillion globally as of the end of September.

“As long as people believe that China continues with a stable to somewhat appreciating renminbi, it’s going to form a solid fundamental base for more money to go to the Dim Sum bond market,” Singapore-based Kim said yesterday.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net; Sandy Hendry at shendry@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.