China’s ‘dim sum’ bond sales rise on demand from domestic investors

Sales of international renminbi bonds have surged this year as the country’s bond investors, hungry for decent yields at home, take advantage of new market access to snap up higher-yielding Chinese-currency debt at the stranger.

The volume of issuance of dim sum bonds – renminbi-denominated debt sold in Hong Kong – rose 145% from a year ago to 126.8 billion Rmb ($19.3 billion), outpacing already the total for the year 2021, according to data from Refinitiv . This puts the market on track for its best year since 2016.

The revival of Hong Kong’s long-stagnant dim sum market contrasts sharply with negative sentiment in China’s onshore renminbi debt market, which foreign investors have been dumping at a record pace in favor of higher-yielding dollar debt. raised.

“The resumption of broadcasts [of dim sum bonds] is real,” said Becky Liu, head of macro strategy for China at Standard Chartered.

On the demand side, Liu said mainland Chinese investors are benefiting from the Southbound Bond Connect program, which was launched late last year and gives Chinese financial institutions access to bonds traded in Hong Kong.

This includes dim sum bills, which offer a yield premium over China’s fixed-income market, where easing measures to combat an economic slowdown have pushed bond yields lower.

And while international investors are swapping their renminbi bond holdings for dollar debt, China’s capital controls are leaving its domestic bond traders with far fewer options, making the dim sum market an attractive source of juicier yields.

Meanwhile, a series of sharp rate hikes by the US Federal Reserve pushed yields on dollar bonds above those on equivalent dim sum debt, prompting more foreign financial groups to raise renminbi funds in Hong Kong that can be used for trade finance and other purposes.

“One of the previous barriers to obtaining renminbi for invoicing to support trade finance and other uses was high interest rates, but that story has now reversed – the cost of financing in renminbi is cheaper than for the dollar,” Liu said.

Column chart of Hong Kong renminbi-denominated bond issuance (in billion Rmb) showing surging dim sum bond sales

This increase in renminbi offshore fundraising is also accompanied by signs of an increase in business deals settled in renminbi. In June, India’s largest cement producer UltraTech adopted Chinese currency to pay for Russian coal imports.

“The dollar is still the dominant currency for global trade, but we have a number of examples indicating a potential increase in renminbi-denominated trade settlements,” Liu said.

And although most dim sum bond sales this year have come from the international branches of China’s largest banks and financial institutions, Refinitiv data shows that foreign issuers account for about a fifth of total fundraising.

Political banks from countries such as Germany, South Korea and Sweden, as well as the World Bank, have all tapped into the market this year, as have lenders to commodity exporters to China, such as the National Australia Bank and Malaysia’s Maybank. A handful of companies sold dim sum bonds, including Hong Kong property group Wheelock.

China’s Ministry of Finance also signaled high-level support for market growth with the sale of Rmb 7.5 billion of offshore bonds in three tranches last month and announced plans to tap the market for a record fourth time later in the year.

Investors said the Southbound Bond Connect program had also boosted Chinese issuers’ interest in selling offshore renminbi debt, with property developer China Vanke raising 500 million yuan in a low-sum deal last month.

“Companies on the mainland that regularly issue offshore bonds are now finding it cheaper to issue dim sum bonds than dollar bonds,” said a senior fixed-income investment manager at an overseas lender. based in Shanghai. “And it’s natural for [Chinese] investors to seek assets with higher returns in offshore markets.

But he added that Chinese financial institutions were still required to report any planned purchase or sale through the bond connection to the country’s central bank and exchange regulator several days in advance. The precautions are part of a regulatory hangover from 2016, when a renminbi rout forced Beijing to impose strict capital controls.

“Outflows are still closely watched by the PBoC and the State Administration of Foreign Exchange,” the chief investment officer said, referring to the central bank, the People’s Bank of China. “They don’t want additional volatility.”

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