The offshore bond base is forecasted to reach Rmb350-400 billion this year due to a mismatch between the demand and supply of CNH assets, tight onshore liquidity and the need for some traditional issuers in the USD bond space to diversify their sources of funding.
Standard Chartered (StanChart) estimates that 50%-55% of deposits – which is predicted to reach CNH700-800 billion by year-end – will be deployed into higher-yielding corporate dim sum bonds as the focus on the Chinese currency appreciation gradually reduces.
“[Deposits] are still in excess of total bonds outstanding and there’s still a need for assets and investors, with a passage of time, to look for higher-yielding assets rather than just bank or money market deposits. So they will move into the dim sum bond space,” said Vijay Chander, a Hong Kong-based head of credit strategy at StanChart to Asiamoney PLUS in a telephone interview Thursday (February 16).
Moreover, total offshore deposits in Hong Kong reached CNH588 billion at the end of 2011 versus CNH22 billion outstanding bonds, which represents 37% of the deposit base.
Dim sum issuers will continue to be attracted by the lower rates prevailing in the CNH market compared to the higher renminbi onshore rates offered on a variety of debt instruments, said the report.
“As long as onshore liquidity in China continues to be tight, Chinese corporates will have a strong need to issue in the dim sum bond markets,” said Sandeep Tharian, a UK-based credit strategist at StanChart in a research report released on February 15.
StanChart also expects traditional issuers in the US dollar bond space to tap into the CNH bond space, which is an apparent trend in other local-currency bond markets.
“It is still cheaper for the issuers to issue in CNH and swap back into US dollars than they were to issue in dollars directly,” said Chander. “For them, even though the absolute yield in CNH is high, what you’re paying to investors on an asset swap basis is cheaper, especially when dollar liquidity onshore is at a premium.”
The issuance of dim sum bond supply is forecasted to reach Rmb170-180 billion this year, which is slightly lower than the record supply of Rmb190 billion in 2011. The year-to-date supply has hit Rmb22 billion.
The bank predicts a net appreciation of 1.4% for the Chinese currency this year and foresees this gain to persist into 2013.