Photographer: Tomohiro Ohsumi/Bloomberg

Biggest Problem for Dim Sum Managers Is Finding Bonds to Buy

  • Debt issuance set to shrink even as maturities climb to record
  • Fubon Asset cuts offshore yuan bond holdings, looks to dollar

Dim Sum bond fund managers, armed with $2.6 billion and little to spend it on, are struggling with a market creaking under the challenges of record maturities and slumping sales.

Ben Hsueh, who oversees an offshore yuan fund at Fubon Asset Management in Taipei, says he has few investment choices at the moment. His high-yield bond fund has reduced holdings of Dim Sum notes to less than 10 percent from 50 percent in 2013, with the remainder made up of a small portion of onshore debt and 90 percent of dollar credit that it hedges back into the yuan.

Hsueh’s story is an illustration of a market in crisis, with three years of yuan depreciation weakening demand for assets denominated in the currency. Foreign investors are also looking onshore to sell debt as China expands access and encourages the expansion of its so-called panda bond market for overseas issuers.

“The Dim Sum market is a transitional one because foreign issuers can sell panda bonds in China and the onshore costs are lower,” said Hsueh. “You don’t have many choices in the offshore yuan market now.”

More than 180 billion yuan ($26 billion) of Dim Sum notes will come due this year, while net issuance is forecast to slump further after slipping into the negative for the first time last year. The size of offshore yuan bond funds has shrunk to a third of 2014’s $9.5 billion, according to data from research firm Morningstar Inc., while the currency has weakened 1.2 percent in the past month in Hong Kong to a two-month low of 6.9200 per dollar on Wednesday.

Buying more dollar credit is one solution. Stratton Street Capital LLP’s Renminbi Bond Fund, the first offshore yuan fund worldwide, has never bought a Dim Sum bond and relies only on dollar notes.

“We have a very large, liquid pool of dollar bonds that we can choose from, and we’ve got almost unlimited choice, and we are hedging into renminbi,” said Andy Seaman, London-based manager of the Stratton Street fund, which beat 96 percent of its peers focused on Asia fixed income in the past five years. The renminbi is the official name for China’s currency, of which the yuan is a unit. “The problem that international investors have is that most Dim Sum issues are too small.”

This year’s issuance of Dim Sum corporate notes have reached $745 million, dwarfed by $570 billion of dollar corporate bond sales worldwide and $124 billion of onshore Chinese debt denominated in the yuan. Tighter offshore yuan liquidity also means implied forward yields are higher, which helps to boost returns when these dollar positions are hedged back into the yuan. All 18 Dim Sum bond issuers this year have been financial firms. In 2014, sellers ranged from Chinese developers to Renault SA and Fonterra Cooperative Group Ltd.

Borrowing Costs

Adding to the challenge in Hong Kong are volatile yuan borrowing costs, with rates often moving more than 1 percentage point a day amid suspected Chinese central bank intervention to make it costlier to short the yuan. Offshore yuan bond funds have returned an average 2.7 percent over the past year, compared with 5 percent for Asia fixed-income funds, data compiled by Bloomberg show.

Issuance will likely revive because there’s still re-investment demand, said Raymond Gui at Income Partners Asset Management (HK) Ltd. His Dim Sum bond fund -- launched in 2010 when access to onshore markets was far more limited -- doesn’t buy onshore securities because of its mandate. The firm has another fund investing in domestic notes.

The offshore yuan market will exist as long as China doesn’t entirely open up the onshore market, and yuan internationalization has only paused after rapid progress earlier, said James Su, managing director at Haitong Asset Management (HK) Ltd., who oversees the city’s first Dim Sum bond fund.

This is not a bad time to buy Dim Sum bonds. The average yield has fallen to 4.71 percent but remains above the historical average, according to a Deutsche Bank AG index. The yield on offshore government bonds still trumps the onshore level. And the drop in new supply should support a rise in prices.

“The bonds have investment value because many are maturing, default risks are low and yields are quite attractive,” said Fubon Asset’s Hsueh. “But if every bondholder thinks that, they’re not going to sell, so it’s hard to find anything to buy.”

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