A man walks by an advertisement for yuan bonds outside the Bank of China Tower. Over 84,000 applications were received for the 5 billion yuan retail tranche, with the total subscription amount reaching 20.176 billion yuan. Jerome Favre / Bloomberg

5 billion yuan retail tranche three times oversubscribed

The Ministry of Finance (MOF) said on its website on Thursday that its yuan-denominated bond sale to retail investors in Hong Kong was three times oversubscribed, underscoring investors' eagerness for exposure to a currency that is widely expected to continue appreciating.

Over 84,000 applications were received for the 5 billion yuan ($783.4 million) retail tranche, with the total subscription amount reaching 20.176 billion yuan, four times the amount offered. The two-year notes carried a yield of 1.6 percent. The sale of the 15 billion yuan institutional tranche on August 17 - as part of the total 20 billion yuan bond sale - also met with strong demand, attracting bids 4.6 times the issue size.

"Part of the reason is uncertainty," said Linus Yip, a strategist with First Shanghai Securities. The turbulent performance of the stock market and continued uncertainty is leading investors to seek a safe haven in yuan bonds, according to Yip.

He added that the attractive yield also fuelled interest.

"The MOF bonds offer higher returns than the US treasuries as well as similar notes issued by the Hong Kong Monetary Authority," said Woody Chan, a treasurer at CITIC Bank International.

The corporate "dim sum" bonds issued so far this year have carried coupon rates ranging from 4 percent to 8 percent. But treasury bonds, Chan reckoned, are in a different category altogether and are known for higher credit quality.

He said expectations that the yuan will continue to strengthen also whetted investors' appetites after the central government pledged to boost the use of the yuan abroad and "increase the renminbi's exchange-rate flexibility".

"The yuan has appreciated about 3.5 percent year-to-date (against the US dollar), and for full-year 2011, it will very likely record a gain of more than 4 percent," said Chan. The yuan rose 0.9 percent in August alone, the biggest monthly gain this year.

The total bond offering of 20 billion yuan was the MOF's third issue in Hong Kong, the city's biggest central government debt sale yet. The previous two issues were for 6 billion yuan and 8 billion yuan respectively.

Vice-Premier Li Keqiang, who attended the launch ceremony for the 20 billion bond issue, said Beijing is committed to selling mainland treasury bonds in Hong Kong to anchor the offshore yuan bond market.

Thirty-eight entities sold a total of 42.7 billion yuan bonds in Hong Kong during the first six months of this year, while the total amount for full-year 2010 was 35.8 billion yuan.

However, there is still a big asset-liquidity gap, Chan noted. Yuan deposits in the city had expanded to 550 billion yuan by the end of June. Outstanding loans, however, were only 11 billion yuan in June, pointing to a yuan loan-to-deposit ratio of just 2 percent.

emmaan@chinadailyhk.com

China Daily

(HK Edition 09/02/2011 page2)