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HSBC Says $58 Billion of Dim Sum Possible in 2013: China Credit

HSBC Says 37% Dim Sum Sales Jump Possible in 2013
Appreciation of the currency makes the assets more valuable to investors. Photographer: Nelson Ching/Bloomberg

Dim Sum debt sales may reach 360 billion yuan ($58 billion) next year as China’s new leaders encourage use of the yuan in finance centers from London to Taipei, the leading underwriter predicts.

Yuan bond and certificate of deposit issuance outside mainland China will rise from 263 billion yuan in the first 11 months of 2012 as cross-border trade settlement in the currency increases, according to HSBC Holdings Plc. Yields on Dim Sum debt have dropped 88 basis points since Dec. 31 to 4.64 percent, according to a Bank of America Merrill Lynch index. That compares with an average 2.61 percent for corporates globally.

Last week’s approval for Bank of China Ltd.’s Taipei branch to clear trades in the currency and China Construction Bank Corp.’s Dim Sum sale listed in London in November show regulators are supporting the expansion of the global use of yuan beyond Hong Kong. Singapore, and possibly London, may also be permitted to clear yuan in 2013, analysts at Deutsche Bank AG wrote in a report last month.

“We’re optimistic and are expecting a decent market next year,” said Gina Tang, head of debt capital markets for greater China at HSBC. “The further growth of the offshore renminbi market and development in other centers including London and Taipei is actually beneficial for Hong Kong as we will continue to be well positioned as the center of most of the business.”

Yuan Clearing

Issuance of Dim Sum bonds and certificates of deposit will likely grow to between 280 billion yuan and 360 billion yuan in 2013, according to an HSBC report dated Dec. 13.

About 860 billion yuan is currently in bank accounts around the world, according to the Nov. 30 report from Deutsche Bank, with yuan deposits in Hong Kong, Singapore, Taiwan and London likely to rise to 1.25 trillion yuan in 2013. Taiwanese companies and consumers may also be able to set up accounts in the Chinese currency after a pact signed between the two governments in August.

Bank of China’s Taipei branch was named as a yuan clearing bank by the central bank last week. The island will work to start clearing the currency within a month, Taiwan’s central bank governor told lawmakers on Dec. 12. The lender is now the sole bank that can clear transactions involving yuan offshore.

Appreciation Allure

China Construction Bank Corp. sold the first yuan-denominated securities listed by a mainland company in London last month. The bank raised 1 billion yuan of 3.2 percent bonds due November 2015, data compiled by Bloomberg show. Nine issuers from Australia to Japan to Latin America now have Dim Sum bonds listed in the U.K. capital, the data show.

London held more than 109 billion yuan of deposits as of the end of 2011, according to a statement from the U.K. Treasury on Nov. 30. Accounts have grown 80 percent this year, according to the statement, which cited Citigroup Inc. data.

Appreciation of the currency makes the assets more valuable to investors. The yuan will strengthen 1.6 percent by the end of next year, according to a median estimate of 27 analysts surveyed by Bloomberg. It has gained 1.95 percent in the second half of this year to 6.2326 per dollar as of 11:24 a.m. in Shanghai today, according to pricing from the China Foreign Exchange Trade System.

“If you believe in the yuan story, you still get a potential gain in total return terms on the foreign-exchange side,” Chia-Liang Lian, the Singapore-based head of investment management for Asia excluding Japan at Western Asset Management Co., said at a briefing in Hong Kong this month. Western Asset manages $10.7 billion of Asian fixed-income assets globally as of Sept. 30.

Costs Decline

Expectations that the yuan will rise against the dollar have helped to lower offshore borrowing costs. Dim Sum yields fell to a 15-month low of 4.55 percent on Dec. 12, according to Bank of America Merrill Lynch indexes.

China’s offshore sovereign notes due June 2022 yielded 3.13 percent as of Dec. 17, 45 basis points less than the 3.58 percent its similar-maturity onshore bonds pay, according to pricing from SinoPac Securities and the China Foreign Exchange Trade System.

Dim Sum debt sales rose 14 percent this year to 191 billion yuan, according to data compiled by Bloomberg, excluding deals with a maturity of less than 12 months and self-led sales below 333 million yuan.

Liquidity Concerns

Lack of liquidity remains a concern for funds, particularly those outside Asia, according to Samson Lee, head of debt capital markets at BOC International.

“We are trying to market-make and provide secondary liquidity, but we have to increase the overall depth of the market and also develop different types of investors at the same time,” he said. “It can’t be done in a day but it will hopefully slowly improve.”

Sales from international issuers outside Hong Kong and mainland China made up 21 percent of total issuance this year, up from 15 percent in 2011, data compiled by Bloomberg show.

Corporacion Andina de Fomento, the Venezuela-based supranational, sold 600 million yuan of bonds this month, while Banco Santander Chile raised 500 million yuan last month, data compiled by Bloomberg show.

The province of British Columbia is now considering selling debt in the currency, which would make it the first international sovereign and the first Canadian issuer to do so, according to Jim Hopkins, an assistant deputy minister in the ministry of finance and Bloomberg-compiled data.

International Buyers

International investors are also buying Dim Sum debt. Germany’s BSH Bosch und Siemens Hausgeraete GmbH sold 57 percent of its 2 1/2-year bonds to European investors while French power generator Alstom SA allocated 25 percent of a sale to the region, according to people familiar with each matter.

The extra cost of insuring China’s debt against non-payment with credit-default swaps for five years over that of Germany’s fell to a five-month low at 19 basis points on Dec. 17, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. China’s CDS was trading at 57.4 basis points yesterday, 90 basis points less than at the beginning of the year, CMA prices show.

Dim Sum bonds, other than those with a maturity of less than a year, could rise to as much as 275 billion yuan in 2013, according to Standard Chartered Plc, the market’s second-largest arranger of Dim Sum bonds. The bank predicted 250 billion yuan of sales this year, including sovereign auctions, 31 percent more than what had been sold as of Dec. 17.

“It’s still growth over last year; not as much as the market on average predicted but not too bad either,” said Tee Choon-Hong, global head of CNH capital market products at Standard Chartered. “It’s spreading from Asia and at same time you’re seeing the markets getting deeper.”

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