Yuan's rising international profile to spur demand at dim sum bond sale

China's planned 12 billion yuan ($1.96 billion) sovereign dim sum bond sale looks set to be as strong as the pace at which global finance hubs are adopting the yuan.

The currency has risen 1.7 percent against the dollar since the Ministry of Finance's last debt sale in Hong Kong on May 21, as the number of cities with clearing banks for its use grew to 11, spanning the globe from Seoul to Doha to Toronto. It was the seventh most-used currency in global payments in September, when direct trading with the euro started in Shanghai. China signed about 545 billion yuan in swap agreements in the second half and the United Kingdom became the first foreign sovereign dim sum issuer.

"China has been setting up more offshore yuan hubs, which generate real demand for bond investments," Frank Huang, head of trading at SinoPac Securities Asia Ltd, said in a Thursday phone interview. "The yuan's recovery and the fact that it's relatively stable are also positive factors for the Ministry of Finance sale."

The offer will include 2 billion yuan of 10-year bonds at a yield of between 3.4 percent and 3.6 percent, according to SinoPac, Fubon Bank (HK) Ltd and Credit Agricole CIB. That compares with the 4 percent it paid for similar debt in May and the yield of 3.66 percent in secondary trading. India offers 8.2 percent on similar-maturity securities, Indonesia pays 7.86 percent and Malaysia 3.85 percent.

One-third of China's trade will be settled in yuan by 2015, HSBC Holdings Plc predicted on Oct 30. The yuan-clearing banks now cover all major trading time zones. China signed currency swap agreements with countries including Switzerland, Russia and Canada in the second half. The UK last month sold 3 billion yuan of three-year dim sum bonds, signaling the nation is including the currency in its foreign-exchange reserves.

China's currency slumped 3.3 percent in the first four months of this year, the longest run of losses in China Foreign Exchange Trading System records dating back to 2007, as the nation guided it lower to deter one-way appreciation bets. The yuan, which fell 0.1 percent last week to 6.1307 per dollar in Shanghai, will extend its recent rally and end 2015 at 6, according to the median estimate in a Bloomberg survey.

Demand for Chinese government bonds in Hong Kong has been boosted by low supply. The finance ministry has sold a total of 96 billion yuan of such notes in the city in the past five years, according to Credit Agricole data. That is equivalent to about 10 percent of Hong Kong's savings pool of 944 billion yuan. Global yuan deposits will reach 2.5 trillion yuan by the end of this year, Deutsche Bank AG estimated on Thursday.

The Ministry of Finance will also auction 5 billion yuan of three-year bonds at 2.8 percent and 2 billion yuan of five-year debt at 3.1 percent in this week's sale, according to the survey. Of the total 12 billion yuan, 3 billion yuan of two-year securities will be sold to Hong Kong residents, according to the Finance Ministry.

"The limited supply of Chinese government bonds makes them precious," said Alvin Lam, Hong Kong-based assistant vice-president of investment portfolio at Fubon Bank. "I expect demand to be pretty strong even for the retail tranche."

Slower economic growth and monetary easing have led to lower Chinese government bond yields, particularly for shorter tenors. The yield gap between three-year and 10-year sovereign notes widened to 35 basis points last week, from 14 bps on Dec 31, Chinabond data showed.

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