Dim Sum Yields Fall as Offshore Yuan Strengthens: China Credit

Dim Sum Yields Fall as Offshore Yuan Strengthens
The yuan rose 0.05 percent last week to 6.2985 per dollar in Hong Kong’s offshore market. Photographer: Stefen Chow/Bloomberg

Dim Sum bond yields dropped last week for the first time in almost a month as the yuan climbed to a five-month high in Hong Kong’s offshore market.

The average yield on yuan-denominated debt in Hong Kong declined three basis points to 5.04 percent, a Bank of China Ltd. index showed. The currency touched 6.2975 per dollar in the city today and on Oct. 5, the strongest level since May 2, according to data compiled by Bloomberg. In Shanghai, China’s currency reached a 19-year high of 6.2812 today, the first trading day after domestic financial markets shut for a weeklong holiday.

During the trading break, China set a date of Nov. 8 for its once-a-decade leadership transition, an event that may be followed by increased stimulus to counter an economic slowdown. The Federal Reserve has pledged to keep its benchmark rate at near zero through mid-2015 and announced last month a third round of so-called quantitative easing, while Europe and Japan also unveiled bond-buying plans.

“The date has removed a major uncertainty over China and there’s hope there will be more stimulus measures,” said James Su, who manages $50 million of fixed-income assets at Sinopac Asset Management Ltd. in Hong Kong. “The weakness in the dollar due to QE3 and a more stable euro are also supporting the yuan.”

The yuan fell 0.02 percent to 6.2990 per dollar in Hong Kong’s offshore market, after climbing 0.06 percent last week. Twelve-month non-deliverable forwards for the currency gained 0.22 percent last week to 6.3955 per dollar, a 1.7 percent discount to the 6.2849 level the currency closed at on Sept. 28 in Shanghai. The contracts were unchanged today as of 11:22 a.m. in Hong Kong. The euro strengthened 1.4 percent last week.

‘Conducive’ Environment

The date for China’s 18th Communist Party Congress and the decision to charge the ousted Politburo member Bo Xilai with criminal offences, after his wife was convicted of murder, were announced by the state-run Xinhua News Agency late on Sept. 28.

The government will cut banks’ reserve-requirement ratios before the Nov. 8 congress to create a “conducive policy environment” for the power handover, Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, wrote in an Oct. 3 note. Australia and New Zealand Banking Corp. also said the government could accelerate monetary easing and fiscal policy implementation with the congress date set.

Manufacturing in China shrank in August and September, contracting in consecutive months for the first time since 2009, according to a government-backed Purchasing Managers’ Index published Oct. 1. A separate PMI released by HSBC Holdings Plc and Markit Economics indicated an 11th straight monthly decline.

Data Signals

Gross domestic product probably climbed 7.4 percent in the third quarter, the least since the first quarter of 2009, according to the median estimate in a Bloomberg survey before data due on Oct. 18. Exports rose 5 percent in September, compared with 2.7 percent growth in the previous month, economists forecast ahead of trade figures scheduled for Oct. 13.

“Investors now see bad data as a sign that the government has to ease monetary policies,” Su said. “While the yuan might not gain much beyond the 6.30 per dollar level this year, I see a chance of one to two more cuts in banks’ reserve ratios.”

Reserve ratios were lowered in May by half a percentage point for the third time in six months, freeing up funds for lending in the world’s second-largest economy. Another 50 basis point reduction is expected “soon,” Liu Li-gang, a Hong Kong-based economist at ANZ, wrote in a note last week.

Exporters’ Pain

Slowing demand in Europe and the U.S. is taking a toll on Chinese exporters, who are seeking a weaker yuan to preserve competitiveness. China’s currency strengthened 4.7 percent last year to 6.2940 per dollar, before stabilizing at about 6.30 in the first four months of 2012. It touched 6.3967 in July, the weakest level since September 2011.

“The room for further yuan gains is limited as a strong currency could hurt exports, which are already quite weak,” said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong.

Five-year credit-default swaps protecting China’s sovereign debt dropped six basis points last week to 83 in New York, the lowest level since Sept. 19, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Disappointing data are a “wake-up call” for Chinese policy makers, Qu Hongbin, a Hong Kong-based economist at HSBC Holdings wrote in a report on Oct. 5. The National Development Reform Committee, the country’s main economic planning body, has approved “a slew of new infrastructure projects worth close to 1 trillion yuan ($158 billion),” Qu said.

Roads, Railways

Domestic banks have been asked by regulators to increase lending to railways, roads and other construction projects to support growth, China Securities Journal reported on Sept. 13, citing an unidentified banker. The State Council announced measures last month to alleviate pressure on exporters such as speeding up tax rebates and expanding financing channels.

“Given the leadership transition is confirmed, local officials are now more comfortable to step up fiscal spending and banks will be more willing to lend,” said Banny Lam, a Hong Kong-based chief economist at CCB International Securities Ltd. “We see the yuan will appreciate as much as 1 percent by the end of this year, given a possible rebound in the economy in the fourth quarter.”

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