China Ministry Sells 14 Billion Yuan of Bonds in Hong Kong

  • Yuan drop likely to be covered by extra yield, Stanchart says
  • China sells 2019 bonds at lower yield than at previous auction

China’s sale of sovereign debt in Hong Kong drew strong interest as demand for the city’s higher yields and limited supply overshadowed yuan depreciation concerns.

The Ministry of Finance sold 14 billion yuan ($2.1 billion) of yuan-denominated notes in Hong Kong on Wednesday, according to the Hong Kong Monetary Authority. A total of 7 billion yuan of three-year notes was issued at 2.9 percent, compared with the secondary market yield of 2.56 percent in Shanghai and an average rate of 3.1 percent at the previous auction in November.

“The auction received very strong demand,” said Becky Liu, Hong Kong-based strategist at Standard Chartered Plc, which had forecast the three-year debt would fetch a yield of 3 percent to 3.1 percent. “We don’t think the yuan will weaken materially and it is likely to be more than covered by the extra yield.”

Sales of offshore yuan-denominated bonds have slumped to 47 billion yuan this year, or about a third of 2015’s total of 157.2 billion yuan, data compiled by Bloomberg show. Issuance recovered to 35.8 billion yuan this quarter from the previous three months’ 11.8 billion yuan that was the least in three years.

China’s leaders have repeatedly tried to play down recent market volatility, with Premier Li Keqiang saying that the nation won’t allow drastic changes to its capital markets and will take steps to ensure stability. The offshore yuan extended gains in mid-morning trading in Hong Kong Wednesday, prompting speculation that the central bank is supporting the exchange rate.

The Ministry of Finance also auctioned 4.5 billion yuan of five-year debt at 3.25 percent, 1 billion yuan of seven-year notes at 3.3 percent, 1 billion yuan of 10-year securities at 3.38 percent and 500 million yuan of 20-year debt at 3.9 percent.

Yields higher than onshore levels are probably the main reason for the strong response, said Frances Cheung, head of Asia ex-Japan rates strategy at Societe Generale SA in Hong Kong.

The allocation ratio was about 55 percent for the three-year bond sale, compared with 42 percent at the last sale in November. For the 20-year debt, the ratio was 97 percent, versus 32 percent earlier.

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