Hong Kong hopes China will raise the 50 billion yuan ($7.8 billion) target for yuan-denominated bond sales by mainland companies next year and sees no signs of a crackdown on issuance, the city’s treasury secretary said.
While Chinese regulators will “always have some sort of target in mind” for how much companies can borrow in the city, the so-called dim sum debt market should sustain its pace of expansion, K. C. Chan, secretary for financial services and the treasury, said in an interview in Hong Kong today. Initiatives announced this week by China’s Vice Premier Li Keqiang will support the market, Chan said.
“We have a new policy which allows non-financial companies to access our bond market,” said Chan. “It starts with 50 billion yuan, financial and non-financial, but we always knew it would start with this number. Next year, that number should continue, and hopefully a higher number. Definitely we see this as a very positive sign.”
Credit Agricole CIB wrote in a report this month that China is likely to restrict remittances of yuan raised beyond its borders to fight “hot money inflows” and this may lead to reduced issuance of dim sum debt. The government limits capital inflows to curb gains in the yuan, which rose 3.2 percent against the dollar this year.
The People’s Bank of China suspended applications from domestic companies to borrow yuan overseas for purposes other than trade financing in mid-July, the Shanghai Securities News reported on Aug. 2. The Hong Kong Monetary Authority said the report was “incorrect” as mainland companies have never been allowed to get direct yuan funding from banks outside China except for trade-related projects.
The funds raised in dim sum bond issues need approval when companies want to repatriate them, “so you know where the money goes, and there’s no question about it,” Chan said. The sales are absorbing yuan that is held offshore and displacing foreign-currency debt issuance, he said.
Chinese regulators will likely be careful in allowing companies to issue yuan bonds in Hong Kong, particularly in property and heavy manufacturing, said Ju Wang, a fixed-income strategist for Asian emerging markets at Barclays Capital.
“What’s the point of tightening onshore and letting these guys borrow cheap offshore?,” said Singapore-based Wang. “Otherwise their monetary policy won’t work.”
Inflation in the mainland accelerated to 6.5 percent last month, the most since June 2008. The People’s Bank of China has increased interest rates five times since September and raised major lenders’ reserve-requirement ratios to a record 21.5 percent, from 17 percent.
Vice Premier Li outlined the target for Chinese company bond sales during a visit to Hong Kong this week and said China will support the use of yuan for foreign direct investment in the nation, a reference to new regulations.
Sales of dim sum bonds dropped to a four-month low of 9.4 billion yuan ($1.5 billion) in July as Moody’s Investors Service warned of governance concerns at Chinese companies and Europe’s debt crisis cooled demand for emerging-market assets. Issuance this year has swelled to 110 billion yuan from 36 billion yuan last year, data compiled by Bloomberg show.
“I expect the growth rate will continue, continuing to be very good,” Chan said. “Once the FDI rules are clear, it’s easier for the various ministries in the mainland to approve the projects. Because they understand what are the procedures and what are the control measures.”
The average yield on dim sum bonds was at 3.14 percent yesterday and reached a record 3.21 percent on Aug. 9, according to the HSBC Offshore Renminbi Bond Index. That’s up from 1.96 percent at the end of March.
An exchange-traded fund for Chinese investors to invest in Hong Kong may be ready to start in a few months, Chan said. Volatility in the stock markets will last for some time given investors’ concern about the U.S. economy and the Europe sovereign debt crisis, he said.
“I ask investors to stay calm, look at the numbers, and look at exactly how it will affect their own economy, and not to be spooked by the market that easily,” Chan said in an interview with Bloomberg Television.