Offshore yuan bond issuance in HK shrinking for first time
Offshore yuan bond issues are set to fall this year for the first time since the Hong Kong market began in 2007 as funding costs have become more expensive than in mainland China.
The dim sum market, as the offshore yuan bond market is known, had expanded rapidly since its inception because borrowers could raise money more cheaply in Hong Kong – a trend that now looks set to end.
Offshore funding costs rose sharply late last year after Beijing approved new channels to let yuan flow back to the domestic market.
Becky Liu, a senior strategist at Standard Chartered, expects higher funding costs to prevail in the offshore yuan market for some time.
“We’ve seen fewer CD issuance in the past few months in Hong Kong and Chinese banks are very likely to switch to the onshore market to raise funds, especially for short-term debt,” Liu said.
A weak currency outlook has dampened investors’ appetite to hold the yuan, as did Chinese property company Kaisa missing a coupon payment, which brought the high-yield dim sum market to a virtual standstill.
Issuance has risen steadily over the past eight years to reach 564 billion yuan (US$90.11 billion) in 2014, according to statistics from Standard Chartered, which expects issuance to fall to 480-500 billion yuan this year.
Although it is very early in the year, Standard Chartered is not alone in forecasting a fall. HSBC, the biggest dim sum bond underwriter, expects a drop of up to 8 per cent.
We’ve seen fewer CD issuance in the past few months in Hong Kong and Chinese banks are very likely to switch to the onshore market to raise funds, especially for short-term debt BECKY LIU, STANDARD CHARTERED
A decline certainly looks probable if sales in January, normally the busiest month for primary bond markets, are any guide.
Dim sum bond issuance, including certificate of deposits (CDs), stood at 12.2 billion yuan for January, down more than 70 per cent from January last year, Thomson Reuters data shows.
Funding costs in offshore yuan market have been on the rise mainly due to broader repatriation channels that drained the offshore pool and tightened liquidity here.
The landmark Shanghai-Hong Kong stock connect scheme that launched in November has already drained a net 67 billion yuan from Hong Kong’s 1 trillion yuan deposit pool in the past two and a half months.
At the same time, sustained pessimism towards the yuan has made the offshore yuan, which used to enjoy a premium over its onshore counterpart, weaker than the onshore yuan. This has slowed the expansion of yuan deposits outside of China and led to tighter liquidity.
The difference between the two rates offers arbitrage opportunities for companies as they can choose a better rate to buy or sell the yuan.
But few companies are willing to bring yuan funds to the offshore market and convert them to dollars when the offshore yuan rate is weaker than onshore rate.
Market trends show traders expect the yuan to fall further given the strength in global dollar index and expectations that Beijing will ease monetary policy to boost the economy.
Liquidity in offshore yuan markets will likely tighten in the near term as the Lunar New Year draws close.
Further out, a scheme expected to be launched this year to link up stock markets in Shenzhen and Hong Kong could add to the strains on offshore yuan liquidity.
