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Deutsche cuts 2012 dim sum forecast by 30%

23 Oct 2012

The bank has cut its supply outlook for offshore renminbi debt issuance from Rmb240 billion to Rmb160 billion due to tighter liquidity and rising funding costs.

Deutsche Bank has reduced its full-year outlook for issuance of offshore renminbi (CNH) bonds and certificates of deposits (CDs) by one third as liquidity pressures and elevated funding costs take their toll.

Greater China rates strategist Linan Liu has trimmed her 2012 net forecast supply from Rmb240 billion (US$38 billion) to Rmb160 billion. The forecast for the fourth quarter (Q4) is a net supply of Rmb40 billion and gross supply of Rmb74.5 billion.

This follows a steep slowdown in the CNH fixed income supply in Q3 which Liu attributes primarily to a lack of net supply of due to a large volume of redemptions and rising cost of funding. Gross issuance of CDs and bonds was Rmb48 billion and net supply amounted to Rmb1 billion, according to Deutsche Bank figures.

Pressures on liquidity will persist to imbalances in the flow of renminbi between the offshore and onshore markets, says Liu.

“We believe there are three reasons for the persistent liquidity pressure in the CNH market: (a) Stagnant growth of CNH deposit base in the past few months; (b) Offshore RMB deposit remitted to onshore banks; (c) Onshore liquidity tightness in Q3 could have attracted cross-border inflows from the offshore market”

The fall in deposits at Hong Kong banks this year has been well documented. However, banks have also been placing deposits onshore as to mitigate the shrinking margins on the higher yields they have to offer on CNH deposits as rates are higher onshore. Some of these remittances are in time deposits which restrict the ability of banks to bring them back offshore when liquidity is tight.

Although liquidity has eased somewhat in October, with Deutsche calculating there is room for the 1-year CD rate to fall by about 30 basis points (bp), only a further opening up of the capital account will deliver better long-term liquidity, argues Liu.

“Structurally, we need to see further liberalisation of capital account, especially capital account flows from onshore to the offshore market (such as offshore banks borrowing from onshore interbank money market, etc.) to sustain healthy growth of the offshore RMB liquidity.”

One positive side effect of the current dynamic is that funding it the CNH bond market could prove cheaper for USD-based borrowers.

“A lack of confidence over the direction of the renminbi means there are a lot of hedges in place to protect against the downside of the renminbi and the cross-currency swap (CCS) is pricing in significant depreciation. This creates space for what I call third-party funding which is borrowers who want to borrow in renminbi and swap back into dollars,” she said.

She uses the recent dim sum bond from VTB Bank as an example. The borrower issued a Rmb1 billion three-year deal which it swapped back into US dollar with a approximately 1% saving on its dollar funding costs. A number of non-Chinese banks have tapped the offshore renminbi bond market in recent months to take advantage of the favourable basis swap. However this opportunity has a limited life.

“I do see this opportunity diminishing because of the strength of the renminbi in the spot market. If China gets growth back in Q4, this will be reflected in a stronger renminbi forward,” she said.

23 Oct 2012