Hong Kong’s hot yuan-denominated bond market is cooling. Yields are now at a 12-month high, as interest in holding yuan assets has waned. But that is healthy. A less frothy market will attract more quality global investors. And now investors realize China’s currency can go down as well as up, the so-called dim sum bond market will mature into a credible source of funding for global companies.
Dim sum bonds have underperformed dollar bonds in the past six months. The pool of available yuan is growing less rapidly, as investors no longer expect the currency to appreciate strongly. Chinese oil firm CNPC’s three-year yuan bonds yield 3.3 per cent, more than the 2.3 per cent for the company’s five-year U.S. dollar bonds. On average, dim sum yields have risen to 4.3 per cent from below 2 per cent in April, according to HSBC.
Oversupply may loom too. As well as Chinese bank issuers, global blue-chips like Caterpillar have tapped this market to fund expansion in China. The Brazilian government said it may sell yuan bonds to help its companies issue debt in the Chinese market. Refinancing adds further pressure: A third of outstanding dim sum bonds will expire in 2012. Gross issuance is expected to be around 285 billion yuan ($45-billion U.S.) for 2012, about 50 per cent more than that of 2011, according to HSBC.
Yet the market is maturing. Global asset managers like BlackRock are now playing, while investment funds have now replaced Chinese banks as the largest investors in recent deals. Buyers of China Development Bank’s recent 15-year bond included insurance companies from Taiwan and fund managers in Europe, according to a person close to the matter, indicating broader interest than before in holding long-dated yuan debt.
Expectations that the yuan may end its appreciation run might be just what the market needs. It will drive out some of the speculation. With investors prepared to take the downside view, it should also enable a proper swap market to develop. That will enable multinationals to raise funds in yuan and switch them into other currencies afterwards, making yuan bonds a viable funding alternative. Cooler dim sum bonds aren’t a sign of failure, but of a market that’s ready to take root.