Central Banks' Demand for China Dim Sum Debt Cools as Yuan Falls

  • Monetary authorities only just took up auction allocation
  • Sale was first since PBOC devalued currency in August

Global central banks only just took up their allocation of Chinese sovereign Dim Sum bonds at an auction in Hong Kong, a sign yuan depreciation is cooling their appetite for the securities just as China’s onshore debt market opens up to them.

The Ministry of Finance sold 12 billion yuan ($1.9 billion) of yuan-denominated notes in Hong Kong on Thursday, of which 2 billion yuan was set aside for monetary authorities. Overseas central banks subscribed for 1.05 times their portion, the lowest ratio since such allocations began in 2012. That compares with 1.83 times at the last of the twice-yearly sales in May. Demand weakened even as China for the first time paid a higher coupon in the offshore market than it pays domestically.

Asia’s biggest economy is on the cusp of winning reserve-currency status for the yuan at the International Monetary Fund, a move Moody’s Investors Service says will encourage central banks to allocate more of their foreign-exchange reserves to yuan assets. In conjunction with this, China is opening its $6.7 trillion interbank bond market to overseas monetary authorities and sovereign wealth funds to ensure a broad selection of securities are available.

Onshore access is a “major reason” foreign central banks’ demand cooled at the latest Dim Sum bond auction, said Frances Cheung, Hong Kong-based head of rates strategy for Asia ex-Japan at Societe Generale SA. The yuan’s addition to the IMF’s Special Drawing Rights "should not affect near-term asset allocation among reserve managers much," she added.

Higher Costs

China’s Ministry of Finance sold 5 billion yuan of three-year notes at 3.29 percent on Thursday, compared with the secondary-market yield of 2.86 percent in Shanghai and the median estimate of 3.25 percent in a Bloomberg survey. That’s the first time it’s paid a premium in Hong Kong since sales of sovereign Dim Sum debt began in 2009.

Yields rose in the offshore debt market since a surprise yuan devaluation on Aug. 11 fueled speculation the currency will depreciate. The currency has lost 2.9 percent so far in 2015 versus the dollar, after posting annual gains in all but two years since a peg ended a decade ago.

In addition to selling three-year notes, the Ministry of Finance also auctioned 3 billion yuan of five-year bonds at 3.4 percent to institutional investors, 1 billion yuan of 10-year notes at 3.31 percent and 1 billion yuan of 20-year debt at 4 percent. Another 2 billion yuan will be made available to individual investors through subscriptions.

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