Hong Kong Haven in Cash Squeeze Eases Dim Sum Lull: China Credit

A slump in Hong Kong’s benchmark yuan interest rates, even as a cash squeeze inflates onshore borrowing costs, is laying the foundation for a revival of the weakest Dim Sum market on record.

The three-month renminbi Hong Kong interbank offered rate, known as yuan Hibor, has fallen 157 basis points since its June debut and touched a record low of 2.44 percent on Oct. 29, according to the Treasury Markets Association. Its discount over the similar gauge in Shanghai widened to 222 basis points this week, from 166 at the beginning of June. Germany’s Landeskreditbank Baden-Wuerttemberg Foerderbank, or L-Bank, raised 250 million yuan ($41 million) selling the first floating-rate Dim Sum linked to three-month yuan Hibor since the fixing was introduced.

Hong Kong’s yuan deposits climbed 28 percent in the third quarter from a year earlier while Dim Sum bond sales tumbled 76 percent, leaving ample supply of the currency in the banking system. China Development Bank Co. yesterday sold 4.5 billion yuan of floating-rate bonds in the city and where the Chinese government is preparing its second offering of 2013.

“The yuan Hibor has been relatively stable, and that helps issuers,” Ho Man Chun, an economist and strategist at Bank of Communications Co.’s Hong Kong branch, said in a phone interview yesterday. “For investors, the stability is attractive at times of uncertainty over global central bank actions, including that of the Federal Reserve.”

Cash Squeeze

The yield on 10-year U.S. government debt rose to a three-week high of 2.67 percent on Nov. 5 as data showed service industries accelerated in October, fueling concern an improving economy will push the Federal Reserve to cut its $85 billion of stimulus sooner than anticipated. The rate on China’s sovereign bonds due 2023 advanced four basis points this month to 4.22 percent yesterday, according to Chinabond data. That’s the highest since September 2008.

The People’s Bank of China boosted the supply of funds in Shanghai’s market late last month as borrowing costs jumped to the highest since a cash crunch in June. The benchmark seven-day repurchase rate climbed 85 basis points to 5.05 percent in October, derailing a stock market rally and driving the one-year government bond yield to a record 4.02 percent. The repo rate was fixed at 3.95 percent today.

Economic Growth

The Dim Sum market had slumped as expectations for yuan gains faded along with a slowing economy. Sales, excluding certificates of deposit, fell to 6.8 billion yuan in the three months through September from 28.6 billion yuan a year earlier, before rebounding to 10.9 billion yuan so far this quarter, according to data compiled by Bloomberg. Gross domestic product will expand 7.6 percent this year, according to the median estimate of economists surveyed by Bloomberg last month. That’s down from 7.7 percent in 2012.

China is looking at deregulation and liberalization, including a push for wider global use of the yuan, to revive growth as Communist Party leaders meet Nov. 9-12 to set economic policy for the coming years. Premier Li Keqiang has signaled that he wants to reduce the state’s involvement in the economy and the financial system and has allowed trial convertibility of the yuan in a free-trade zone in Shanghai.

“There has been strong buying momentum in the offshore yuan spot and forward markets from corporates and exporters, which pushed Dim Sum yields lower,” said Tan Kian Hoe, Hong Kong-based head of asset liability management for greater China and Japan at Standard Chartered Plc. “There is more interest now to take advantage of the lower rates in Hong Kong. The volume of Dim Sum issuance has been picking up.”

Yuan Deposits

The Chinese currency has appreciated 2.2 percent against the greenback this year, helping fuel a surge in Hong Kong’s yuan savings, the world’s biggest offshore pool. Deposits rose to a record 730 billion yuan in September from 545.7 billion yuan a year earlier, according to the Hong Kong Monetary Authority. The currency will rise another 1.6 percent by the end of next year, according to a Bloomberg survey, which would make it Asia’s fourth-biggest gainer in 2014. The yuan slipped 0.02 percent to 6.0938 per dollar in Shanghai today.

“Continued yuan appreciation means higher repayment costs, which deters some corporates from borrowing in yuan, especially through loans,” said Ngan Kim Man, head of interest-rate trading at Hang Seng Bank in Hong Kong. “Even though borrowing costs in Dim Sum bonds have become more attractive relative to onshore, for Chinese companies, whether they can repatriate the funds back to China remains a concern.”

The average yield on offshore yuan government bonds was 63 basis points lower than similar debt in Shanghai yesterday, compared with a 21 basis point premium in June, according to indexes compiled by HSBC Holdings Plc.

Deep Base

L-Bank adopted the yuan Hibor to price its bonds because of the “deep deposit base,” Sven Lautenschlaeger, the lender’s international funding officer, said in a Nov. 4 e-mail interview. “We saw good demand from bank treasuries and fund managers out of Hong Kong and Singapore,” he said, adding that this allowed the lender to expand the sale from an initial planned issue of 200 million yuan.

Supply of Dim Sum notes is set to increase before the end of the year, with China’s Finance Ministry planning to sell 10 billion yuan of the securities in Hong Kong on Nov. 21.

“On the lending side, funding is cheaper offshore than onshore, so there are Chinese corporates coming to borrow,” said Cynthia Wong, head of emerging-market trading for Singapore and Hong Kong at Societe Generale SA.

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