Piping hot yields

The offshore renminbi liquidity crunch hit the Dim Sum market hard at the start of the year, but an attractive carry-trade opportunity should rekindle the interest of onshore buyers once capital controls are eased.

Tentative signs of renminbi stability immediately after the Lunar New Year have breathed much needed life into the beleaguered Dim Sum bond market, however conditions still are not ripe for a sustained resumption of new deals.

Syndicate bankers in Hong Kong say the shrunken Dim Sum market is now almost entirely the preserve of Chinese banks eager to foster the offshore currency business, while corporate issuers have switched to onshore funding.

All is not lost, however. Bankers expect the market to reopen to corporate borrowers later this year if worries over capital flight ease sufficiently for the People’s Bank of China to loosen its tight grip on cross-border currency flows.

Capital controls

On February 15, the Chinese currency posted its biggest one-day gain in more than one decade, providing some comfort to a Dim Sum market that had been battered in January by the CNH liquidity crunch.

“I am not too pessimistic about Dim Sum bonds. If the US holds up decisions on rate hikes, onshore money will quickly resume buying Dim Sum bonds once the PBoC eases the restrictions and that could be a turning point for the market.”

Traders said the sell-off of Dim Sum bonds had abated and yields on short-dated notes had started to fall. But they also warned that the recovery might be cut short by a recurrence of market volatility.

With the US Federal Reserve expected to raise rates much slower this year than previously thought, some traders hope the Chinese central bank will feel confident enough to relax capital controls.

“It is hard to predict the direction of the renminbi, but I am not too pessimistic about Dim Sum bonds,” said a Hong Kong-based syndicate banker with a major Chinese bank, “If the US holds up decisions on rate hikes, onshore money will quickly resume buying Dim Sum bonds once the PBoC eases the restrictions and that could be a turning point for the market.”

Vast amounts of onshore money are available to invest in Dim Sums and exploit the widening spread between onshore and offshore bonds, despite the reported suspension of new investment applications under the Renminbi Qualified Domestic Institutional Investor programme.

Using cheap onshore funding to buy higher-yielding Dim Sum bonds promises easy profits and the bonds would receive a boost in response to demand from onshore Chinese investors, bankers and analysts say.

According to the BOC China Offshore-Onshore Bond Yield Difference Index (BOC CIFED Index), liquid Chinese corporate Dim Sum bonds sported an average index yield some 324bp higher than their comparable onshore counterparts in early February.

“I believe what the Dim Sum market has suffered reflects the growing pains of the renminbi’s internationalisation. It is a matter of time before the market gets back on track,” said Steve Wang, head of fixed-income research at BOCI Securities.

Panda traction

In the short run, however, things are not looking good. HSBC forecasts total Dim Sum issuance of Rmb260bn-Rmb300bn in 2016, down about 30% from last year.

“2016 will be another tough year for the Dim Sum bonds,” said Helen Huang , a fixed income analyst with HSBC. She estimated that only around 15% of the projected Rmb260bn-Rmb300bn Dim Sum issuance will come from corporate issuers. The bulk will come from banks.

So far this year, not a single public offering of Dim Sum bonds was launched. In January, offshore renminbi debt issuance, mainly CDs, fell to Rmb6.5bn from Rmb27bn a year earlier, Huang said.

Meanwhile, the offshore currency pool is shrinking. Renminbi deposits in Hong Kong have fallen to Rmb851.1bn from about Rmb1trn a year ago, the first yearly drop on record.

Given such grim market conditions, syndicate bankers are trying to repurpose Dim Sum issuance programmes into onshore Panda bonds or bonds denominated in other currencies.

“I really wouldn’t suggest to my clients to go for Dim Sum in this market. Pandas make a lot more sense,” said a syndicate banker with a Chinese bank.

Hungary, the only issuer which publicly announced its intention to sell a Dim Sum in January, has started to explore a Panda bond instead if a Dim Sum offering proves impossible in the near future, according to market sources.

State-owned China Nuclear Engineering Group Corporation has had to delay a debut Dim Sum. The company approved the plan internally at the beginning of last year, but has been struggling to strike a decent deal, according to bankers on the deal.

In contrast, early Dim Sum market defectors have fared better.

British Columbia, the first foreign government entity to issue Dim Sum bonds in late 2013, was also the first to jump ship to the onshore market. It printed Rmb3bn three-year debut Panda bonds at 2.95% on January 21, out of a Rmb6bn issuance plan it registered with Chinese regulators.

The Canadian province intends to use the proceeds to invest in offshore renminbi products initially, according to Finance Minister Michael de Jong.

Although bankers are not sure how easy it would be for issuers to move onshore proceeds offshore due to current controls on capital outflow, they say that arbitrage opportunities between the onshore and offshore renminbi market are among the main incentives for Panda bond issuers.