CNH TRACKER SELLOFF, NEW BUYERS TO HERALD CHANGES IN BOND SALES BY SAIKAT CHATTERJEE HONG KONG, OCTOBER 13 2011
Recent volatility in global markets may have an unexpected benefit for the offshore yuan market, broadening the potential investor base for so-called "dim sum" bonds by permanently changing the way the debt has been sold. At a recent Thomson Reuters CNH panel discussion, HSBC's credit strategist Becky Liu said more institutional investors including central banks, Taiwanese insurers and banks are showing a rising interest in the market. The bank is the biggest underwriter of CNH debt with a quarter of market share. "Potential demand from Taiwanese insurers alone is in the region of $20 billion and that kind of flows would give a lot of stability to the market," she said at a panel last week. Even as these yuan-linked bonds took a beating in recent weeks, market players were optimistic that the volatility would make prospective investors realise the credit risks associated with some of these instruments. Issuance has grown from nowhere to nearly 200 billion yuan so far as banks, funds -- long-only and hedge funds -- have snapped the bond up, betting on further appreciation of the yuan. But over the past couple of weeks, their performance has suffered as the volatility in international markets made investors realise that crowded bets on yuan gains had distorted the pricing of some of these bonds. Less than 40 percent of dim sum issues are rated compared to nearly all in the international markets. Morgan Stanley says investors should consider focusing on high grade debt rather than high yield as the additional credit risk is not being reflected accurately because of the flatness of the yield curve. As crowded bets on yuan appreciation fade and more investors step in, this should bring more transparency to the underlying businesses selling these debt as investors demand international standards like credit ratings. Early signs are visible. Debt syndicate bankers were not interested in getting deals rated previously because of the paperwork involved and its popularity, says Ivan Chung, a senior vice president at ratings agency Moody's. "Now we see more queries from them. This shows that the investor base is changing and even state-owned enterprises are getting more alert to investor demand," Chung said.
LEAGUE TABLES CHART OF THE WEEK YTD Dim sum bond issuance Chinese issues cool: http://link.reuters.com/gam44s Amount Number After peaking out at nearly 45 billion yuan in May, issuances by Chinese companies Bookrunner Rmb (m) of issue in the international, dim sum and the synthetic yuan markets have declined HSBC Holdings PLC 29,355.0 57 steadily, partly due to a spate of accounting scandals and increased market volatility in September. At slightly more than 11 billion yuan, September is just Standard Chartered PLC 16,281.3 36 Bank of China Ltd 8,281.7 13 about the lowest point in 2011. Deutsche Bank AG 8,117.6 14 RBS 7,674.5 19
China firms take dim sum road in shaky markets Based on Thomson Reuters data as of October 13, 2011
Bond issuance – bln yuan Dim sum G3 Synthetic 50 YTD synthetic RMB
40 bond issuance: Amount Number 30 Bookrunner Rmb (m) of issue
20 Deutsche Bank AG 4,679.2 4 Citi 2,912.5 2 10 Bank of America Merrill Lynch 2,312.5 1 Bank of China Ltd 2,312.5 1
0 HSBC Holdings PLC 1,248.5 2 J F M A M J J A S 2011 Based on Thomson Reuters data as of October 13, 2011 Source: Thomson Reuters
Reuters graphic/Christine Chan 13/10/11
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WEEK IN REVIEW Offshore yuan markets have been hurt by rumors this week in local media that the Hong Kong Monetary Authority prevented some currency trades from being cleared after discovering they were not linked to goods and services trade. But the HKMA said the recent weakness in the offshore yuan has been due to market movements and were not trade-related. It did not comment specifically on the rumors. Worries the clearing bank would run out of its 8 billion yuan quota have grown after it suddenly exhausted its limit last month, sparking a panic. Bridges to Beijing. The government will strengthen the city's role as China's offshore yuan hub by establishing strong and extensive links with the mainland's onshore yuan market via three channels, namely trade, direct investment and equity investment, Hong Kong's chief executive Donald Tsang said. Of convergence trades: The weakness in offshore yuan markets this week has been due to large unwinding of so-called "convergence basis trades" where banks and companies heavily sold dollars in CNH currency forwards and bought them in the NDF markets, betting that a gap between them would close. And divergent opinions: Institutional research house Gavekal says most of its U.S. clients believe China is headed for a hard landing of epic proportions while its European and Asian clients are much more sanguine about its prospects. The divergence in views, stems from the accounting frauds by some Chinese companies and concerns about China's real estate woes. Much of this year's gains in dim sum bonds have been wiped off in the recent global selloff of riskier assets. Year-to-date, total returns of dim sum bonds in dollar terms stands at 0.93 percent. Out of this, gains from the yuan's rise is 2.16 percent and 2.05 percent flows from coupon payments. That has been largely offset by a 3.27 percent drop in value of bonds measured by HSBC's index. On deal street, Malaysian government investment arm Khazanah Nasional pulled the covers off its long-awaited dim sum sukuk, the first of its kind in the market. Pricing talk on the three year deal centered in the 3 percent area. BOC International, CIMB Bank and RBS are the leads on the offering.
(Additional reporting by Nethelie Wong at IFR and Michelle Chen; Editing by Kim Coghill)
For feedback or more information on CNH coverage, contact Saikat Chatterjee at [email protected] or +852-2843-6548
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