Dim Sum Sales Cut at Deutsche Bank on Yuan Squeeze: China Credit
A shortage of yuan in Hong Kong caused deposit rates to double in four months and prompted Deutsche Bank AG to slash its forecast for Dim Sum bond sales.
The three-month interbank rate jumped to 3.15 percent in the city yesterday, up from a three-month low of 1.55 percent on June 20. That’s nine times the equivalent rate for Hong Kong dollars and approaching the 3.70 percent interbank rate in Shanghai. Germany’s largest bank cut its 2012 forecast for net sales of yuan debt in Hong Kong on Oct. 19 by 33 percent to 160 billion yuan ($25.6 billion).
Premier Wen Jiabao’s ambition of making Hong Kong a hub for the globalization of the renminbi is stalling as a slowing Chinese economy damps expectations for yuan gains, prompting companies in the city and onshore to hoard foreign currencies. SinoPac Asset Management Ltd. says the rise in 10-year sovereign Dim Sum yields to a record high is a buying opportunity, while Fullerton Fund Management Co. favors corporate debt.
“Tight liquidity makes Dim Sum sales harder,” said Ju Wang, a strategist in Hong Kong at HSBC Holdings Plc, the leading underwriter. “Some banks probably hoarded dollars, which coupled with a weak outlook for the renminbi, reduced the accumulation of the pool in Hong Kong.”
Dim Sum debt sales fell to 5.7 billion yuan this month, from 10.5 billion yuan in September and set for the weakest level this year. Issuance of 143.4 billion yuan this year, compares with 152 billion yuan for all of 2011, according to data compiled by Bloomberg that excludes short-dated certificates of deposit.
After weakening in the first two quarters of this year, the yuan rebounded and is now 0.7 percent stronger in 2012, the slowest advance since 2009. It touched a 19-year high of 6.2446 per dollar on Oct. 18 and was little changed at 6.2487 today.
Expectations for yuan gains have returned and liquidity has improved onshore, easing the cash crunch in the city, said Wang at HSBC, which has a 24.4 percent share of Dim Sum underwriting this year. Inflows of capital forced the monetary authority to intervene to prevent the Hong Kong dollar from strengthening this week.
“Issuers will opportunistically return to the market in the next few weeks as the recent strength in the renminbi has improved overall market sentiment towards dim sum bonds,” Suanjin Tan, a Singapore-based Asian fixed income portfolio manager at BlackRock Inc. (BLK), which manages $3.67 trillion as of Sept. 30. “The overwhelming demand for paper we have witnessed in the dollar space is also likely to filter through to the dim sum market as investors scramble for yield.”
The yield on 10-year sovereign Dim Sum notes closed at 3.29 percent, 17 basis points lower than the record high reached last month, according to data compiled by Bloomberg. Similar-maturity securities yielded 3.03 percent in South Korea and 1.79 percent in the U.S.
Bond buying by the Federal Reserve, the European Central Bank and the Bank of Japan (8301) is prompting global investors to plow more money in higher-yielding securities. Emerging-market bond funds have attracted more than $42 billion this year, compared with the $17.3 billion for all of 2011, according to data research firm EPFR Global.
“We have seen some money coming back to government bonds this month, pushing up prices,” said James Su, Hong Kong-based portfolio manager at SinoPac Asset Management, which manages about $200 million in assets. “The scarcity of supply will keep long-term government Dim Sum bonds in demand and help support prices.”
Gerard Teo, Singapore-based head of strategy and currency at Fullerton Fund Management which manages about S$10 billion ($8.2 billion) in assets, said earlier this month that his company favored corporate notes in the offshore yuan market that offer “additional yield pick-up.”
Russia’s VTB Bank sold 1 billion yuan of three-year Dim Sum bonds on Oct. 16 at 4.5 percent, according to data compiled by Bloomberg.
Deutsche Bank attributed the shortage of yuan in Hong Kong to banks that remit money onshore for higher investment returns.
“Given that more channels of cross-border flows were permitted, the onshore and offshore liquidity condition has become increasingly correlated, particularly at times of acute liquidity stress,” said Linan Liu, a Hong Kong-based Deutsche Bank strategist. “The offshore yuan liquidity pressure and elevated funding costs will remain a key funding constraint in the final quarter.”
The one-year swap rate paid to get hold of renminbi in the city rose to 2.95 percent on Oct. 22, the highest in Bloomberg data going back to September 2010, before falling to 2.69 percent yesterday. Yuan deposits in Hong Kong fell 1.9 percent to 552 billion yuan in August, the lowest level since May 2011, data showed on Sept. 28. The total has dropped 75 billion yuan since reaching a record 627 billion yuan at the end of November.
China’s onshore government bonds returned 4.1 percent in the past year, compared with 2.8 percent on Hong Kong government securities, according to indexes compiled by HSBC Holdings. The notes offer an average yield of 3.67 percent versus 0.59 percent in Hong Kong.
The People’s Bank of China has opted to use money-market operations to contain borrowing costs since benchmark interest rates were lowered in June and July and banks’ reserve requirement ratios were last relaxed in May. The Shanghai interbank offered rate, or Shibor, for three-month yuan loans reached an 11-week high of 3.71 percent last week.
Signs of an improvement in the world’s second-largest economy propelled China’s 10-year government bond yield to 3.55 percent yesterday, rising from a 22-month low of 3.24 percent on July 11, according to Chinabond data.
The cost of protecting China’s sovereign debt against non- payment for five years using credit-default swaps touched 70 on Oct. 18, the lowest level since May 2011, was at 74 yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. The contracts pay the buyer face value in exchange for the underlying securities should a government or company fail to adhere to debt agreements.
Hong Kong’s central bank bought $1.25 billion yesterday at HK$7.75 per U.S. dollar, the strong end of the currency’s peg. That followed a $603 million intervention on Oct. 19, when it stepped into the market for the first time since 2009.
“Money is coming back into the region, even for the Hong Kong dollar,” said Andy Yeung, a treasurer at the Hong Kong unit of Los Angeles-based Cathay General Bancorp. (CATY) “We will have to wait and see if this will turn around the yuan too.”
-- With assistance from Yanping Li and Tanya Angerer in Singapore. Editors: Sandy Hendry, Simon Harvey