Caution grows in 'dim sum' bond market

SHANGHAI -- Continued depreciation of the yuan has made investors more cautious in credit checks of offshore yuan bond issuers as the fear of a market reaction has caused some Chinese companies to turn to dollar bonds to raise cash.

On Monday, the central parity rate of the yuan against the US dollar weakened 5 basis points to 6.1591, a new seven-month low, according to the China Foreign Exchange Trading System.

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Since mid-February, the yuan has depreciated by nearly three percent, meaning investors snapping up "dim sum bonds," or yuan-denominated bonds issued outside the Chinese mainland, can no longer speculate on a rising yuan.

The high and stable yield of these bonds, plus the potential for yuan appreciation, have provided nice returns for investors, causing excessive demand in the bond market over the past three years, said Wallace Lam, head of HSBC's high yield markets business in Asia. He said that many investors had been attracted by the stronger yuan.

As the yuan becomes volatile and the expectation of unilateral appreciation of the yuan ends, investors need to reevaluate dim sum bonds and focus more on the credibility of bond issuers, said Lam.

Fu Peng, dean of the Chinese Academy of Macro Hedge, said that with the yuan depreciation factored in, the real returns of many of these bonds were negative.

"But considering the limited channels for offshore yuan investment, the dim sum bonds remain a choice," he said.

In the long term, once mainland and Hong Kong investors are allowed to conduct cross-market trading on the Hong Kong and Shanghai stock exchanges, market enthusiasm for dim sum bonds will be dampened, Fu said.

"The remedy is to offer higher yields to allure investors," he added.

Chen Yang, a board director with Shenyin & Wanguo Securities, remains optimistic about dim sum bonds. However, he said it remains difficult for companies to raise cash on the Chinese mainland's financial markets.

"Credit conditions remain tight on the Chinese mainland, and many companies have a strong wish to issue corporate bonds. Given that domestic interest rates are relatively high, most of them prefer to issue bonds overseas. We expect more companies to issue dim sum bonds this year," said Chen.

Standard Chartered Bank predicted that by the end of this year, the total volume of dim sum bonds could exceed 750 billion yuan, most of which will be fueled by refinancing demand.

In the first quarter of this year, the total issuance of new dim sum bonds in Hong Kong surged to 125 billion yuan (20.1 billion US dollars), more than doubling the amount of the previous quarter, official statistics showed.

Analysts said that the strong market performance was boosted by a spate of factors, including the participation of heavyweight issuers, such as state-owned enterprises (SOE), onshore financing difficulties and loss of price difference between onshore and offshore yuan.

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