China's dim sum auction: a short-lived benchmark

The Chinese government is making the right move by auctioning Rmb20bn ($3.13bn) of offshore renminbi bonds this week, creating a curve in the nascent market. But poor liquidity means it could be several years before the government can really set a liquid benchmark for bankers to use when pricing deals. Coming to market more often would help.

  • 16 Aug 2011
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China’s Ministry of Finance is planning to auction around Rmb20bn of bonds on Wednesday this week, selling two year, three year, five year, seven year and 10 year bonds — and creating a benchmark yield curve in the process.

The concept of a risk-free rate has been somewhat soiled by the European sovereign crisis and the US. But in the dim sum market, the China issuance is as close as anyone will get to having a risk-free curve.

It would be nice to think that this would instantly improve the efficiency of pricing in the dim sum market, giving corporations and banks alike a handy yield curve to price against. But the market is still in an early stage of development. The multi-tranche deal is unlikely to be very liquid after even a few weeks of secondary trading. That means it will quickly become a fairly useless benchmark for other borrowers.

The government wants to sell offshore renminbi bonds every year, and analysts hope that it will eventually be a real benchmark-setter in the dim sum market. But for now, those investors who do buy the new government bonds are likely to hold them until maturity, and any selling is likely to be in too small a size to generate accurate prices over any sustained period.

That does not mean the government is wasting its time. It will for a short period define the steepness of the offshore renminbi curve, and any borrowers that come to the market over the next few weeks will be able to make good use of that.

The simultaneous auction of three and five year bonds will be particularly useful for borrowers who come to the market this month, since many companies who have already sold three year deals — the standard in the dim sum market — may now want to expand to the five year part of the curve.

But the long-term benefits of the government auction are likely to be limited if it sticks to its target of one deal a year. It will need to come back a lot more often if it harbours any ambition to set a consistently useful benchmark.

  • 16 Aug 2011

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1 JPMorgan 17,834.38 72 10.56%
2 Citi 16,648.84 65 9.86%
3 HSBC 14,502.17 79 8.59%
4 Deutsche Bank 10,659.15 37 6.31%
5 Standard Chartered Bank 8,423.03 47 4.99%

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1 JPMorgan 7,610.36 27 13.98%
2 Citi 6,685.06 20 12.28%
3 HSBC 4,539.92 22 8.34%
4 Deutsche Bank 3,547.08 9 6.52%
5 Standard Chartered Bank 3,538.08 13 6.50%

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2 Goldman Sachs 162.26 37 8.77%
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1 AXIS Bank 1,318.15 23 14.27%
2 Trust Investment Advisors 1,079.75 29 11.69%
3 ICICI Bank 773.60 21 8.37%
4 Citi 601.55 5 6.51%
5 Standard Chartered Bank 591.66 6 6.41%