Top Dim Sum Arrangers See Sales Drop as Panda Bonds Grab Share

  • Offshore issuance to fall as much as 40 billion yuan: HSBC
  • Yields are higher in Hong Kong than Shanghai as yuan slumps

The biggest underwriters of Dim Sum bonds are braced for a second year of declining business as the opening up of China’s capital markets gives global borrowers access to lower onshore interest rates.

Offshore sales of yuan-denominated debt will drop by as much as 40 billion yuan ($6.1 billion) from issuance of about 300 billion yuan in 2015, according to HSBC Holdings Plc, the top arranger for the last five years. Second-ranked Standard Chartered Plc said there’s scope for a decline, without giving an estimate. Credit Agricole CIB forecast as many as 20 yuan note offerings by foreigners onshore, known as Panda bonds, after eight last year.

The Dim Sum market is shrinking as the yuan’s slide to a five-year low damps global funds’ appetite for the securities, pushing yields to levels above those available in Shanghai. China’s government paid higher coupons on sovereign notes sold in Hong Kong than it did domestically in November for the first time since sales began in 2009. South Korea became the first country to sell Panda bonds last month and the Canadian province of British Columbia is preparing an issue, after selling Dim Sum notes in 2014.

"The Dim Sum market is in an awkward position: while issuers are switching to the onshore market to sell debt including Panda bonds as yields are declining, onshore investors who are interested in the debt’s higher yields don’t have enough channels to move their money to Hong Kong," said Helen Huang, a credit analyst at HSBC in the city. "While the lackluster Dim Sum market will have another challenging year in 2016, the Panda market will grow gradually as authorities allow more funds in."

Dim Sum bond sales fell 38 percent to a three-year low of 286 billion yuan in 2015, the first decline since the market’s inception in 2007, according to data compiled by Bloomberg. The average yield on Dim Sum debt climbed 20 basis points in the past year to 5.18 percent Tuesday, a Deutsche Bank AG-compiled index shows. The yield on the one-year onshore sovereign bond dropped 81 basis points in the past year to 2.45 percent as the central bank cut benchmark interest rates six times within 12 months. Issuance of Panda bonds rose to 11.5 billion yuan in 2015, from 2 billion yuan in 2014.

While China is opening its capital markets to foreign investors and issuers, it’s less keen on letting funds out after surging capital outflows pushed the yuan down last year by the most in two decades. That prompted the government to impose restrictions on yuan outflows, including ordering a halt to offshore banks borrowing from domestic markets through bond repurchases.

The State Administration of Foreign Exchange, which has approved 132 local institutions to put as much as $89.99 billion in offshore assets via its Qualified Domestic Institutional Investor program, hasn’t granted any new allocations since March. By contrast, policy makers allowed more foreign financial institutions into the nation’s onshore bond market to attract funds from overseas.

Onshore Liquidity

With plentiful onshore liquidity, the overnight repurchase rate in Shanghai fell 89 basis points in the past year to 1.97 percent. By contrast, the interbank lending rate for the yuan in Hong Kong touched a record 9.5 percent on Dec. 23., compared with an average of 3.3 percent in the past year. The median forecast is for the yuan to weaken to 6.6 against the greenback at the end of 2016 from 6.5514 as of 2:48 p.m. on Wednesday in Shanghai.

The yuan sank to the lowest level since March 2011 on Wednesday after China’s central bank set the currency’s reference rate at an unexpectedly weak level, a sign that policy makers are becoming more tolerant of depreciation as intervention costs rise and economic growth slows.

"We expect the Dim Sum market to remain challenging in 2016," said David Yim, Hong Kong-based head of debt capital markets at Standard Chartered for Greater China. "If the Panda bond market develops as expected and once more detailed rules are out, corporates may choose to issue Panda over Dim Sum if they need the yuan to support their business in China."

‘Good Opportunities’

“There are good opportunities for the panda bond market to expand in 2016" as demand will be strong domestically because it’s a new asset class and it will receive policy support as China opens its capital account, said Liu Linan, a Hong Kong-based senior rates strategist at Deutsche Bank AG. Liu expects Dim Sum bond issuance to increase by 50-100 billion yuan this year, an expansion that "is not strong by historical standards."

British Columbia plans to sell as much as 3 billion yuan of Panda bonds probably this month, according to a person familiar with the matter. Among the corporate issuers lined up are Export-Import Bank of Korea and Russia’s Vnesheconombank.

Small Steps

"The Chinese regulators will take cautious, small steps as they open up the Panda bond market this year," said Jeffrey Qi, a fixed-income portfolio manager at the Hong Kong unit of E Fund Management Co., which oversees 600 billion yuan. "The market will grow this year, but not at a dramatically fast pace."

Panda bonds will remain a small segment of the market and won’t surpass Dim Sum in the foreseeable future since standards for disclosure and accounting have yet to be released, said Standard Chartered’s Yim. Both markets will thrive in the long run as the government’s support and the yuan’s inclusion in the International Monetary Fund’s basket of reserves benefits the currency, said Benjamin Lamberg, Hong Kong-based head of Asian syndicate at Credit Agricole.

"Global issuers from Europe to the U.S. and global asset managers need to put their hands more on assets denominated in both onshore and offshore yuan," Lamberg said. "People are waiting for the cycle of depreciation to stop before putting their hands into the pipe."

— With assistance by Tian Chen

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