Dim Sum Sales Rebound Tipped as Yuan Strengthens: China Credit

Sales of Dim Sum bonds are set to rebound from a record low as China’s economy shows signs of improvement and expectations build for yuan gains, according to Fitch Ratings Ltd. and DBS Group Holdings Ltd.

Yuan-denominated bonds sold outside of mainland China have gained for seven consecutive weeks, a Bank of China index shows, a sign demand for the securities is strengthening. The average yield on Dim Sum notes fell to 4.43 percent on Oct. 11, the least since May, and yuan forward contracts suggest traders are the most bullish on the currency in more than a year.

Investor optimism about Dim Sum bond sale prospects remains buoyant, Fitch Ratings Ltd. said in an Oct. 9 report, even after issuance plunged to 3.7 billion yuan ($606 million) last quarter, the worst such period on record, according to data compiled by Bloomberg. More than three quarters of investors in Fitch’s survey expect both the on- and offshore bond markets to increase by 25 percent to 50 percent in the coming 12 months, driven by the yuan’s appreciation potential and tighter onshore financial conditions.

“The Dim Sum market can grow at least 20 percent next year,” said Clifford Lee, the head of fixed-income at DBS, Southeast Asia’s largest bank. “We’ll see a more mature pace of growth in 2014, underpinned by China’s economic expansion and greater price stability.”

Appreciation Prospects

Dim Sum borrowing costs have dropped nine basis points this quarter, versus an 11 basis-point increase in the same period of last quarter, Bank of China indexes show. Yields have ranged from 3.84 percent to 6.00 percent over the past year.

Twelve-month non-deliverable forwards for the yuan have strengthened 2.2 percent since the end of June to 6.1515 per dollar yesterday in Hong Kong, outpacing the currency’s 0.5 percent advance to 6.1079 in Shanghai. The contracts, which are traded offshore and reflect both appreciation prospects and interest rates, were at a 0.7 percent discount to the onshore spot rate, the smallest gap since July 2012.

The spot rate rose as much as 0.03 percent today to a 20-year high of 6.1063 per dollar in Shanghai. The nation’s foreign-exchange reserves, the world’s largest, rose to a record $3.66 trillion as of Sept. 30 from $3.5 trillion at the end of June, according to central bank data released yesterday.

Chinese Premier Li Keqiang, speaking last week at an Association of Southeast Asian Nations summit in Brunei, said the nation’s economic growth probably exceeded 7.5 percent in the first nine months of the year, a sign the government may this week report success in arresting a two-quarter slowdown.

‘Less Correlated’

The National Bureau of Statistics reports July-September growth on Oct. 18, with the median estimate of 33 analysts surveyed by Bloomberg News predicting a 7.8 percent expansion, up from the second quarter’s 7.5 percent.

Corporate Dim Sum notes have gained 0.31 percent this month, compared with a 0.09 percent decline for company debt denominated in Singapore dollars and a 0.06 percent increase for Hong Kong dollar-denominated company bonds, HSBC Holdings Plc indexes show.

“Dim Sum bond returns have outperformed others in Asia because they’re less correlated to U.S. rates,” said Crystal Zhao, a Hong Kong-based fixed-income analyst at HSBC. The yuan has stayed resilient even as most other emerging-market currencies weakened after the Federal Reserve said it may dial back its bond-buying program, she said.

‘Hot Money’

The yuan has gained 2 percent against the dollar this year, the most among 11 major Asian currencies tracked by Bloomberg. Known officially as the renminbi, it strengthened to the 20-year high after the central bank yesterday raised the currency’s reference rate to a record and as consumer prices advanced the most in seven months. It’s poised to end the year at 6.1 per dollar, according to the median estimate in a Bloomberg survey of analysts.

Some 55 percent of the 72 investors interviewed by Fitch in its survey listed yuan appreciation as a key driver of interest in China’s local-currency bond markets -- a stronger level of currency confidence than for all other regional bond markets. The full survey results will be published later this month.

Former People’s Bank of China academic adviser Li Daokui said in an interview last week that President Barack Obama’s nomination of Janet Yellen as the next Fed chief means there will be a “prolonged period of appreciation” for the yuan as additional “hot money” flows into China. Yellen is deemed to be more in favor of maintaining stimulus, known as quantitative easing, that has driven capital to developing markets.

Primary Pipeline

Currency appreciation alone isn’t a strong enough reason for growth in the Dim Sum bond market, according to Frank Huang, Hong Kong-based head of trading at SinoPac Securities Asia Ltd.

“Since we’ve started this quarter, I don’t see any deals in the pipeline and secondary market trading has also fallen away,” Huang said. “With China’s growth rate slowing, yuan gains probably won’t be as much as they were previously.”

China’s exports unexpectedly fell in September, signaling the constraints of global demand on the nation’s goal to expand 7.5 percent this year. Overseas shipments dropped 0.3 percent from a year earlier, customs data showed on Oct. 12. New yuan loans topped estimates yesterday in central bank data while the broadest measure of credit fell from August, as authorities try to support expansion without boosting shadow finance.

BP, Caterpillar

Credit-default swaps insuring China’s debt against non-payment were 79.9 basis points as of Oct. 14, down from a high this year of 147 basis points in June, CMA prices show. The yield on China’s 10-year government bonds rose four basis points to 4.07 percent, according to Chinabond data.

BP Plc, Europe’s second-biggest oil company, sold 1.2 billion yuan of five-year securities at 3.95 percent on Oct. 2, the last sale from a multinational company, according to data compiled by Bloomberg. The notes received more than 6.3 billion yuan of orders from 130 accounts, a person familiar with the matter said on Oct. 3.

Total SA, the Paris-based energy company, mining and construction machinery maker Caterpillar Inc. and SK Global Chemical Co., the petrochemical unit of South Korea’s SK Innovation Co. helped push sales to 2.3 billion yuan last month in what was the busiest such period for issuance from companies outside of China since June, the data show.

Industrial and Commercial Bank of China (Asia) Ltd. was the last company to offer Dim Sum bonds, borrowing 300 million yuan via 3.04 percent 2014 notes earlier this month.

China’s Ministry of Finance said it will sell 10 billion yuan of bonds “soon” in Hong Kong, the Hong Kong Economic Journal reported on Sept. 21, citing Au King-Chi, permanent secretary for financial services and the treasury.

“The biggest encouragement for Dim Sum bonds would be if the Chinese state-owned enterprises and policy banks sell some bonds in the following months,” said HSBC’s Zhao. “Yuan appreciation is definitely one of the biggest supporting factors of the Dim Sum market.”

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