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Discounted Hong Kong Debt to Rally on Yuan Demand: China Credit

China, in an effort to lure Hong Kong savers to its debt, starts selling 3 billion yuan ($450 million) of two-year bonds today at a higher yield than it offered on longer-maturity notes sold to institutions last week.

The December 2012 securities are being offered to individual investors with a 1.6 percent coupon, 60 basis points more than fund managers got on the three-year notes. The yield is likely to drop at least 30 basis points, or 0.30 percentage point, this month as prospects for yuan gains fuel demand, according to analysts at Credit Agricole CIB, Royal Bank of Scotland Plc and Standard Chartered Plc.

“There will be an overwhelming response from the Hong Kong public given deposits are rising and the yuan should appreciate,” said Dariusz Kowalczyk, a senior economist at Credit Agricole in Hong Kong. “There’s a good chance we’ll see queues outside banks. This bond is a rare gem in the market.”

China is seeking to broaden the range of investment options for its currency in Hong Kong, where yuan deposits jumped 67.8 billion yuan in October to a record 217 billion yuan. The coupon offered on the December 2012 debt compares with the 3.08 percent yield for similar-maturity government bonds on the mainland, reflecting limited access to the market for offshore investors.

HSBC Holdings Plc’s Hong Kong unit offers interest of 0.71 percent on 12-month deposits of less than 500,000 yuan, compared with 2.5 percent at its branches in mainland China. The amount of outstanding yuan-denominated debt in Hong Kong is about 55 billion yuan, a quarter of the city’s deposits, according to data compiled by Bloomberg. The People’s Bank of China increased the number of companies eligible for cross-border yuan trade settlements to 67,359 from 365, the Hong Kong Monetary Authority in a statement yesterday.

Exim Bank, Caterpillar

Last week’s sale of December 2013 bonds in Hong Kong was part of a 5 billion yuan offering that drew orders from fund managers for 10 times the securities available. The sale included 10-year debt with a 2.48 percent coupon and five-year notes at 1.8 percent. Yields have since slipped to 2.42 percent and 1.71 percent, respectively, while the rate on the three-year debt has declined six basis points to 0.94 percent.

Export-Import Bank of China’s two-year debt in Hong Kong yield 1.24 percent, down from 1.95 percent when it was issued on Dec. 2, Treasury Markets Association data show. The state-owned lender’s notes were included in a 5 billion yuan offering primarily targeted at individual investors that drew orders for 14 times the amount of notes available.

So-called dim sum notes issued a day earlier by Caterpillar Inc., the world’s biggest maker of construction equipment, with a coupon of 2 percent yield 1.36 percent. Caterpillar has a foreign-currency debt rating of A from Standard & Poor’s, the sixth-highest grade, while China’s local-currency rating was a level higher at A+.

Yield, Appreciation

The rate on China’s two-year notes will drop by about 30 basis points before the end of the month, according to Credit Agricole’s Kowalczyk and Pin Ru Tan, a strategist at Royal Bank of Scotland in Singapore. A decline of as much as 50 basis points is possible, said Delphine Arrighi, a Hong Kong-based strategist at Standard Chartered.

“Investors are attracted by the marginal yield pickup and potential for the currency to appreciate,” said Arrighi, whose bank is one of 19 handling the sale. “Given the lingering debt woes in Europe and uncertainties surrounding the impact of quantitive easing in the U.S., the China story is even more compelling and sort of appears as a new safe haven.”


Ireland joined Greece on Nov. 28 in seeking a bailout from the European Union and the International Monetary Fund, while the cost of insuring bonds issued by Portugal, Spain and Italy climbed to records last week. The Federal Reserve last month announced plans to buy $600 billion of Treasuries, a policy known as quantitative easing that boosts the supply of dollars, after $1.7 trillion of previous asset purchases failed to boost the economy sufficiently.

The yuan has appreciated 2.7 percent in Shanghai since a two-year peg ended in June and non-deliverable forwards indicate the currency will gain 2.2 percent in the coming 12 months. The currency was unchanged today at 6.6485 per dollar. The offshore rate was at 6.6390.

Expectations for the fastest currency gains among the so-called BRIC nations of Brazil, Russia, India and China are also adding to the allure of yuan assets. The yuan will gain 5.9 percent by the end of 2011, compared with 4.2 percent for the Indian rupee, 4.2 percent for Russia’s ruble and a 2.9 percent decline for Brazil’s real, according to the median estimates in Bloomberg surveys of analysts.

Default Swaps

Five-year credit-default swaps on Chinese government bonds fell one basis point to 68 basis points today, ICAP Plc prices in Hong Kong show. 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.

The yield drop on China’s new two-year note will likely become “more sluggish” as the rate starts to near returns on deposit accounts in Hong Kong, Royal Bank of Scotland’s Tan said. The subscription period for the sale will end Dec. 14, and the debt will be issued Dec. 20, according to a Ministry of Finance statement.

Galaxy Entertainment Group Ltd., the casino operator part-owned by Permira Advisers LLP, plans to sell 1 billion yuan of bonds in Hong Kong, Robert Drake, chief financial officer, said in a phone interview yesterday.

Shui On Land Ltd., Hong Kong billionaire Vincent Lo’s real estate company, hired Deutsche Bank AG, Standard Chartered Plc and UBS AG to help it explore opportunities for yuan debt, according to a person familiar with the matter.

Yuan Story

McDonald’s Corp. sold 200 million yuan of three-year notes in September in Hong Kong, becoming the first foreign company to sell dim sum bonds. United Co. Rusal, the world’s largest aluminum producer, said in September that officials met bankers to learn about the market.

“An offshore yuan bond market is a great way for investors to get exposure to the yuan story without having such tough restrictions as investing onshore,” said Sergey Dergachev, who helps manage the equivalent of $8.5 billion of emerging-market debt at Union Investment in Frankfurt. “We will see more companies that will follow McDonalds and issue yuan-denominated bonds in Hong Kong. This will induce more inflows and support the yuan’s dynamics.”

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