Wednesday, December 1, 2010

China's Yuan Bonds Meet Strong Demand in Hong Kong

China's Yuan Bonds Meet Strong Demand in Hong Kong

By FIONA LAW

HONG KONG—China's Ministry of Finance said Tuesday demand from financial firms for its second yuan bond issue in Hong Kong was strong, with the 5 billion yuan ($750 million) institutional portion about 10 times subscribed.

The finance ministry's three-year benchmark tenor coupon was fixed at just 1.0%, lower than most recent yuan bond issues in Hong Kong, reflecting global investors' robust interest in yuan-denominated assets, driven by expectations of a further appreciation in the Chinese currency and limited yuan-related investment options.

The latest sovereign bond issue, which totals 8 billion yuan, is part of the ministry's plan to establish a benchmark yield curve for future yuan-denominated bond issues in the city and comes as Hong Kong's de facto central bank issued data affirming investors' appetite for yuan assets remain strong.


SIGNS OF SUCCESS: Symbols with Chinese renminbi, or yuan, signs are seen Tuesday at the launch celebration for the second batch of yuan sovereign bonds in Hong Kong.

.The Hong Kong Monetary Authority said Tuesday yuan deposits in the city jumped 45% to 217.1 billion yuan in October, up from 149.3 billion yuan in September, due mainly to an increase in yuan receipts by Hong Kong companies through trade settlement transactions.

China has allowed certain mainland financial institutions to sell yuan bonds in Hong Kong for several years, but the market for yuan-denominated debt outside the mainland only began to take off in recent months as Beijing relaxed rules to allow foreign firms to issue yuan bonds in Hong Kong.

The Ministry of Finance's yuan bond issue represents a 2 billion yuan increase from its first, 6 billion yuan bond sale in Hong Kong in September 2009, and includes bonds with longer tenors, signaling another step forward in China's plan to internationalize the yuan.

The finance ministry offered 5 billion yuan of yuan bonds with maturities of three, five and 10 years to institutional investors. The five-year tenor coupon was fixed at 1.8% and the 10-year tenor coupon at 2.48%.

Traders said the coupon rates, which were set at a steep discount compared with onshore sovereign bonds with the same maturities, were much lower than expected.


Onshore three-year Chinese sovereign bonds are trading at a yield of about 3.06%, while five-year bonds are about 3.60% and 10-year bonds at 3.87%.

The strong international demand for yuan-denominated bonds in Hong Kong has been fuelled mainly by expectations the Chinese currency will appreciate, and by foreign investors who aren't able to investdirectly in domestic debt because of strict capital controls. Underwriters of the finance ministry's bond issue said they saw keen interest from U.S. and European financial firms.

"It's not a surprise to see interest from these firms that are chasing higher returns in a high-liquidity environment," said Wesley Kong, head of fixed-income investment at Haitong Asset Management in Hong Kong.

He said expectations that the yuan could appreciate 5% a year make the yuan bonds attractive, as three-year U.S. Treasurys have a yield of only around 0.7%.

The Ministry of Finance said it sold the yuan bonds through CMU BID, a bond-tendering platform operated by the Hong Kong Monetary Authority's Central Moneymarkets Unit, instead of through the traditional bookbuilding process.

A group of 160 financial firms, comprising local and global financial institutions, were permitted to bid for the bonds, according to the HKMA.

A further 3 billion yuan of two-year yuan bonds will be offered to retail investors between Dec. 7 and Dec. 14, at a coupon fixed Tuesday at 1.6%, according to the finance ministry.

Write to Fiona Law at Fiona.Law@dowjones.com

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