Pimco Sees Dim Sum Refinancing Boom on Cash Crunch

Pacific Investment Management Co. sees a 2014 boom in issuance outside the mainland by Chinese companies, driven by a record amount of Dim Sum bonds set to expire and a cash crunch in domestic markets.

Offshore yuan notes maturing this year, excluding certificates of deposits, will more than double to 91.1 billion yuan ($15.1 billion), according to data compiled by Bloomberg. The 3.95 percent average yield on Dim Sum bonds compares to a record 6.29 percent onshore and the 4.76 percent for dollar securities in Asia, according to Bank of America Merrill Lynch indexes that track yuan data since 2004.

“A lot of local and Dim Sum bonds are coming up for maturity so there will be a lot of refunding needs,” said Raja Mukherji, the Hong Kong-based head of Asian credit research at Pimco, manager of the world’s biggest bond fund. “Given that onshore rates have been ticking up in China, corporates may choose to go to the offshore bond markets and extend their maturity.”

Dim Sum bond issuance last quarter surged to the highest in more than two years and the offshore yuan climbed to a record yesterday in Hong Kong as Premier Li Keqiang accelerates efforts to ease currency controls and boost convertibility. By contrast, onshore yuan issuance fell to the lowest since the first three months of 2012 as the world’s second-largest economy experiences the worst cash crunch since June.

Refinancing Needs

The offshore yuan advanced 0.13 percent to 6.0492 per dollar as of 5:01 p.m. yesterday in Hong Kong, data compiled by Bloomberg show. It earlier touched 6.0448, the strongest level in data going back to August 2010. People’s Bank of China Deputy Governor Yi Gang wrote in a Jan. 1 article that the nation will expand the opening up of its foreign-exchange market and expand its participants.

Dollar borrowing costs for companies in Asia rose 89 basis points last year, after the U.S. Federal Reserve said it would reduce its bond purchases. Average yields on offshore yuan notes fell 7 basis points in the same period, Bank of America Merrill Lynch data show.

“Supply of Dim Sum bonds will increase in 2014 because of the refinancing needs, cost advantage over onshore and renminbi internationalization,” said Raymond Gui, a Hong Kong-based senior portfolio manager at Income Partners Asset Management, which oversaw $1.4 billion in assets as of June 2013. “U.S. dollar yields have been climbing these days, so I don’t see much cost advantage of dollar funding over Dim Sum for Chinese names.”

Cash Crunch

In Shanghai, the yuan closed 0.05 percent higher yesterday at 6.0506 against the greenback, China Foreign Exchange Trade System prices show. It earlier reached 6.0500, the strongest level since the government unified the market and official exchange rates at the end of 1993.

The seven-day repurchase rate, a gauge of interbank funding availability, averaged 5.16 percent last month, the highest since June, according to a daily fixing rate announced by the National Interbank Funding Center.

Last month’s cash crunch in the interbank market, the worst since June, is forcing Chinese companies to offer bonds at the highest yields since the 1997 Asian financial crisis. Evergreen Holdings Group Co., an AA- rated shipbuilder with 16.5 billion yuan of debt, sold one-year notes at 9.9 percent on Dec. 6, the highest among publicly issued onshore bonds since 1997, according to data compiled by Bloomberg.

“The widening yield gap between onshore and offshore debt markets is likely to lure interest from Greater China entities” to issue offshore yuan notes, Crystal Zhao, a Hong Kong-based strategist at HSBC Holdings Plc, wrote in a report last month. “What’s more, onshore yields are likely to rise further next year as the central bank aims to maintain its prudent monetary stance.”

Scrapped Sales

Domestically, a total of 26.8 billion yuan of planned bond offerings were scrapped or delayed last month, according to Bloomberg-compiled data. China Coal Energy Co. said on Dec. 24, it canceled a 1 billion yuan note sale due to market volatility, according to a statement posted on the Shanghai Clearing House website.

Local non-financial corporates have a record 2.6 trillion yuan of principal and interest due on bonds in 2014, according to data compiled by China International Capital Corp. Societe Generale SA, Nomura Holdings Inc. and Guotai Junan Securities Co. have warned the first default in onshore notes may come this year.

Jilin Cheng Cheng Group Co. missed timely principal payment on a 100 million yuan loan, according to a statement on the Shanghai Stock Exchange this week.

Forecast Returns

China’s government has 6 billion yuan of Dim Sum notes due this year, the most of any borrower. Agricultural Development Bank of China follows with 3.6 billion yuan and a unit of government-owned Sinochem Group, China’s biggest supplier of chemical products, comes third.

Among international issuers, Caterpillar Inc., the world’s biggest maker of mining equipment, has the most due this year with two Dim Sum notes worth a total of 2.26 billion yuan.

Sales of bonds and certificates of deposit will reach 520 billion to 570 billion yuan in 2014, compared with 350 billion in the first 11 months of 2013, according to the report from HSBC, the market’s top arranger since 2011. Issuance of Dim Sum securities, excluding certificates of deposits, jumped to 30.5 billion yuan in the fourth quarter last year, the most since the three months ended June 30, 2011, Bloomberg-compiled data show.

“We are optimistic about the Dim Sum bond market in 2014 and expect a total return of 3 to 4 percent in U.S. dollar terms,” said HSBC’s Zhao. “Broadly, we expect more international participation from issuers and investors.”