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Bank of China Tips Offshore Convertible Bonds for Yuan Gain Bet

Convertible bonds sold by Chinese companies overseas offer foreign investors a way to bet on an appreciating yuan, also known as the renminbi, according to Bank of China Ltd.

“The avenues to be exposed to the renminbi are very limited” for foreigners yet a move by China to strengthen its currency is a “certainty,” Steve Wang, a credit strategist for Bank of China International, said in a telephone interview from Hong Kong.

Investors who use dollars to buy yuan-denominated notes of companies including Country Garden Holdings Co. and Hidili Industry International Development Ltd. may also benefit from gains in their credit quality and shares, he said.

Policy makers in China, including central bank chief Zhou Xiaochuan, have said they’re waiting for clearer signs of a global economic recovery before deciding whether to allow gains in the yuan to combat inflation. The yuan has remained at about 6.83 per dollar under a peg maintained since mid-2008, a strategy criticized by U.S. lawmakers as giving China an unfair edge in global markets.

Standard Chartered Plc analysts have said China may abandon the peg before meetings between Chinese and U.S. economic officials in Beijing starting on May 24. Yuan forwards show investors are betting on about a 2.1 percent gain against the dollar in the next year.

Offshore convertible bonds are issued by Chinese companies to global investors, denominated in yuan and settled in U.S. dollars.

Country Garden’s bonds due in 2013, Hidili’s 2012 bonds, and real estate company New World China’s zero percent 2012 bonds are among offshore convertibles that offer the best return potential for investors, according to Wang.

If the yuan were to appreciate by about 3 percent by February 2011, Country Garden’s 2013 notes would yield about 5.8 percent compared with 2.4 percent at the current peg, he said.

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