BOCI Quadruples Yuan-Tied Note Sales Before Bearish Bets Emerge

BOC International Holdings Ltd. has quadrupled its sales of structured notes tied to the offshore yuan to a record this year, capitalizing on demand before some investment banks began betting against the currency.

The investment-banking unit of Bank of China Ltd. has sold about 1.1 billion yuan ($179 million) of notes this year through May, based on exchange rates offered in Hong Kong, according to Abby Ye, an executive director for fixed-income structured products at BOCI. Offshore yuan-tied securities, mostly sold to private banks in the city, now account for more than half of the lender’s issuance in the currency, compared with less than 10 percent last year, Ye said.

The yuan has advanced 1.4 percent against the dollar this year, making it the best performer among 24 emerging-market currencies tracked by Bloomberg. Strategists from Barclays Plc to Deutsche Bank AG are now advising investors sell the currency, amid signs of slowing growth in the Chinese economy and waning trade inflows. BOCI hasn’t offered any offshore yuan-linked notes since May 10, according to data compiled by Bloomberg.

“Strong conviction held by investors that the offshore yuan would further appreciate against the dollar in the foreseeable future” drove the offerings through last month, Ye said, responding from Hong Kong by e-mail to questions from Bloomberg. “A good number of notes have been launched since the end of 2012 to express this view.”

China’s Growth

The most popular products have one-year maturities and earn coupons if the offshore yuan gains at the end of their tenor, Ye said. BOCI has also issued longer maturity notes betting on appreciation in the currency and rising interest rates, she said. BOCI is the only Chinese issuer of structured securities tied to the currency, according to data compiled by Bloomberg.

The jump in the company’s sales of yuan-tied products this year was followed by data showing China’s slowing growth.

Yuan positions at domestic lenders from foreign-exchange transactions, a gauge of capital inflows, rose 67 billion yuan in May, the smallest gain since November, figures released by the People’s Bank of China on June 14 showed. Foreign-direct investment rose 0.3 percent to $9.26 billion last month from a year earlier, the smallest gain in four, the Ministry of Commerce said on June 18.

Exports increased 1 percent in May, after gaining 15 percent the previous month, while industrial production rose 9.2 percent, trailing the median forecast of 9.4 percent among 39 economists surveyed by Bloomberg.

Currency Bets

That’s prompted currency strategists at Barclays and Deutsche Bank to recommend investors sell the yuan this month. HSBC Holdings Plc also cited spiking money-market rates amid a cash squeeze in forecasting on June 25 the yuan may weaken to 6.16 per dollar by the end of 2013. The currency traded at 6.1501 as of 9:52 a.m. in Shanghai today.

Building on the growth in yuan-related investments, BOCI is also looking to expand into other asset classes for its structured-note business, Ye said. The company may resume issuance of credit-linked notes halted by the financial crisis, she said.

“We’ve seen growing and definitive demand for it,” Ye said. “We’re in several discussions internally and externally to re-launch this business.”

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