PBOC Rate Cuts Threaten Yuan Structured Note Market as IFC Sells

International Finance Corp., the Washington-based financing unit of the World Bank, sold its first structured note denominated in yuan after a measure of Chinese shares in Hong Kong rose to the highest in seven years.

IFC raised 600 million yuan ($97 million) via two-year notes tied to the Hang Seng China Enterprises Index, which last month increased to the most since January 2008. The securities pay a 4.4 percent coupon if the benchmark holds above 14,248 for the first year and 14,796 for the second, and zero otherwise. The measure closed at 14,132.16 Thursday.

Offerings of structured notes in China, sold under the banner of wealth management investments, totaled 276 in number in April, the most in more than two years, according to data from Chengdu-based research firm Cnbenefit. While the nascent market is expected to grow, stock market performance and interest rate cuts by China’s central bank may make returns more volatile, Cnbenefit researcher Li Linxia said.

“A structured note market is beginning to emerge in yuan,” IFC Hong Kong-based spokesman Hannfried von Hindenburg said. This points to increasing liquidity in the market and a greater depth of investors, he said.

The People’s Bank of China has trimmed borrowing costs three times since November in a bid to ensure the nation meets its 7 percent growth target. Asia’s biggest economy remained sluggish at the start of the second quarter, suggesting policy makers’ steps to free up more funds for lending haven’t been enough.

‘Less Incentive’

Structured product offerings rose 49 percent in the week after China’s last rate cut of 0.25 percentage points on May 10 even as returns declined by an average 0.24 percent, according to Li.

“The recent PBOC rate moves serve to drive the offshore yuan lower, so there’s less incentive for clients to focus on structured notes denominated in that currency at the moment,” Janet Chong, the head of product solutions at DBS Group Holdings Ltd.’s Hong Kong wealth management unit, said. “The current preference among clients with offshore yuan is to hold cash.”

The yuan is steady against the dollar this quarter, according to data compiled by Bloomberg. Two-year offshore yuan deposits paid 2.54 percent as of May 19, down from a high this year of 3.75 percent reached March 30.

“What people like about offshore yuan notes is the attractive carry versus U.S. dollars and for structured notes, you’ll always buy the currency with the higher carry with relatively stable foreign-exchange outlook,” Ben Sy, the Hong Kong-based head of fixed income, currencies and commodities for Asia at JPMorgan Chase & Co.’s private banking unit, said, referring to an investors’ interest return on a currency. “If China continues to cut rates, it will make offshore yuan less attractive.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE