Prudence Investment Buying Dim Sum Bonds on Yuan Gain Bet

Prudence Investment Management (Hong Kong) Ltd. is boosting holdings of dim-sum bonds, betting China will allow the yuan to appreciate as much as 5 percent in the next 12 months as the economy averts a “hard landing.”

“China is not heading for a hard landing,” Managing Partner Yuan Wang said today at the Bloomberg Link China Conference in Hong Kong. “It’s an interesting time and we are buying.”

Prudence is purchasing yuan-denominated bonds in Hong Kong as the securities head for a record monthly loss amid concern China will slow currency gains to protect exports as the global economy cools. High-yield dim sum bonds probably got oversold by investors this month, Wang said, signaling he expects a rebound. Steve Wang, head of fixed-income research at BOCI Securities Ltd., a unit of China’s third-biggest lender by market value, said the yuan will continue to gain 3 to 5 percent annually.

The yuan is Asia’s best-performing currency this year, rallying 3.8 percent against the dollar, compared with a 10 percent plunge for India’s rupee and a 3 percent loss for Taiwan’s dollar. The People’s Bank of China set its daily reference rate stronger for a fifth day at 6.3425 per dollar today, the highest level since a peg ended in July, 2005, after Premier Wen Jiabao pledged on Oct. 22 to continue efforts to curb inflation.

Prudence started its first fund that buys yuan-denominated debt in Hong Kong in January and added a second in July focused on Japanese investors. Dim sum issuance jumped to 131 billion yuan ($20.6 billion) this year from 35.7 billion yuan in the whole of 2010, data compiled by Bloomberg show.

Yuan Fixing

Stronger fixings are bolstering the yuan in Hong Kong, where the currency advanced 0.3 percent in the past two days to 6.4038 per dollar. That took this month’s gain to 1.4 percent after a 2.1 percent slide in September that was the biggest loss since offshore trading commenced in the city in July 2010.

BOCI Securities’ Steve Wang said he favored the debt of state-backed companies over private firms.

“For companies with a state-owned background, you probably won’t worry about the default possibility,” he said. “Some of them have got much cheaper now and offer much better value.”

The average yield on dim sum debt rose to a record 3.69 percent yesterday, still less than the 5.30 percent average rate for top-rated three-year yuan corporate bonds in Shanghai and the lowest local-currency borrowing cost among BRIC nations. The three-year, yuan-denominated bonds sold in Hong Kong by Hainan Airlines Ltd., backed by Hainan provincial government, fell as much as 8 percent from their debut price to 92.84 on Oct. 13. The debt traded at 95.76 today.


Next year will be a “year of consolidation” for China’s property sector, while property and land prices could be under pressure, JP Morgan Chase & Co. Hong Kong-based analysts Lucia Kwong and Ryan Li wrote in a note today. The yuan-denominated, three-year bonds sold by Guangzhou R&F Properties Co. in Hong Kong have lost 26 percent since their debut on May 11.

“Currently, I probably will stay away from property,” said Prudence’s Wang. “I’m not saying they are going to default, but there are just so many headwinds for them.”

China needs to increase the amount of land available for residential projects and properly manage the construction of guaranteed housing by measures including ensuring there is enough capital, Premier Wen Jiabao said on Oct. 22. The control of the property market is at a “critical” period, he said. Beijing signaled it is aiming for a 5 to 10 percent correction in home prices, Wei Yao, a Hong Kong-based economist at Societe Generale SA, wrote in a report last week.

More Rated

Dim-sum bonds are increasingly getting graded by credit-rating companies and are luring more capital from Europe, Shearman & Sterling’s Hong Kong-based Partner Kyungwon Lee said at the conference. “More deals are including a comprehensive covenant package” and the market is moving toward protecting investors more, he said.

European investors picked up about 14 percent of a recent issue, while those from China and Hong Kong bought about 76 percent and buyers from Singapore bought the rest, signaling increased diversification of demand, Lee said.

The average yield on China’s sovereign yuan-denominated debt in Hong Kong is 1.48 percent for maturities of one to three years, compared with 0.70 percent a month ago, based on the BOCHK Offshore RMB Bond Index. Three-year bonds in Shanghai yielded 3.503 percent yesterday, Chinabond data show.

The nation’s inflation rate was 6.1 percent in September, down from 6.2 percent the previous month, while the economy expanded 9.1 percent in the third quarter, the least since 2009, according to government data.

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