Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

As far as bonds go, the internationalization of the yuan is on hold -- for now. Offshore issuance of securities denominated in the Chinese currency, so-called Dim Sum notes, has come to a grinding halt as yuan deposits in Hong Kong fell more than 15 percent over the past 14 months. With less money offshore, demand for this kind of debt has dwindled.

Rapid Descent
New issues of Dim Sum bonds have dropped as deposits in Hong Kong fall
Source: Bloomberg

Don't dismiss the market yet, however. Instead of disappearing, it may be staging a homecoming. Bloomberg News reported on Monday that five or six Australian companies are considering Chinese currency issues onshore, while Singapore's DBS Bank has applied for a 1 billion yuan ($154 million) Panda bond quota. The market could receive a further boost if global bond index providers add the onshore debentures to their gauges, something Pimco says could happen sooner rather than later.

Waning Appetite
Yuan deposits in Hong Kong have dropped 15 percent after peaking at 1 trillion yuan in December 2014
Source: Hong Kong Monetary Authority

Corporate bond issuance onshore already reached a record last year after China loosened curbs and the yield on five-year government debt dropped almost one percentage point to 2.6 percent amid a succession of interest rate cuts.

Growth Spurt
Corporate bond issuance in China surged to a record in the fourth quarter of 2015
Source: Bloomberg

With more stimulus on the way, the allure of non-government debt will increase. And as the cost of funding drops, it will also become cheaper to sell Panda bonds, as notes issued by foreign companies in China’s domestic market are known.

As for the Dim Sum market, it appears to be suffering a slow death, in spite of Beijing's top central bank officials saying they remain hopeful about its future.  Besides deposits in Hong Kong, turnover of money market instruments in the currency have also dropped significantly, another sign of waning interest in yuan-denominated debt outside of China.

About Face
After five years of higher turnover, the tables have turned for money market issues in yuan
Source: Hong Kong Monetary Authority
* Total volume in respective currencies

Apart from the inclusion of onshore debt in international indexes, two hurdles remain to the Panda bond market's transformation into a serious funding avenue for companies across Asia.

For now, the ability to sell debt onshore is still dictated by quotas meted out by regulators, and they can be quite onerous to obtain. It's unclear when the system will become more aligned with Western markets, where issuers have only to register with authorities and not necessarily get their permission when it comes to how much they can sell and at what yield.

Then there's the currency's value itself. Companies that need money in dollars, but are considering going to China for cheaper funding, will want more clarity about the future value of the yuan so they can hedge their exposure. 

Ultimately though, there will be no shortage of corporate treasurers willing to go to the mainland, even if it means skipping Hong Kong on the way.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net