By Saikat Chatterjee
HONG KONG, June 20 (Reuters) - Ripples from a worsening cash
squeeze in China's interbank money markets are reaching the
offshore yuan market and threaten to derail a recent surge of
bond sales as investors shun debt.
From January through May, average monthly sales of offshore
yuan bonds or dim sum debt were nearly 20 billion yuan ($3.26
billion). The pace dropped sharply in the first 20 days of June,
with sales of few than 7 billion yuan in bonds. Unless the pace
picks up, June will have the smallest sales since last August,
according to Thomson Reuters data.
Market participants expect conditions to deteriorate further
in the offshore yuan market before they get better.
An onshore fund shortage has caused bond auctions to fail
and sent interbank money rates spiraling up as smaller banks
have been forced to hunt for scarce funds.
A combination of seasonal factors such as banks'
end-of-quarter reporting and a crackdown on hot money inflows by
China's forex regulator in recent weeks have been cited as
Traders expect tight liquidity to last another few weeks but
to improve significantly from mid-July, after the seasonal
effects of the quarter-end fade and a large volume of maturing
PBOC bills and government bonds injects cash into the market.
'It is going to be a painful few weeks for the offshore yuan
market. In addition to the fund squeeze, the global environment
for fixed-income assets has also worsened noticeably in the past
few weeks,' said a fund manager at an investment house in Hong
An HSBC index for measuring the performance of Asian local
currency bonds has dropped by 5 percent from a record peak in
The cash squeeze has sent interbank rates in the Hong Kong
market spiraling up to near record highs above 4 percent
from less than a percentage point a month ago.
As most banks and funds rely on the overnight money market
to fund their investments in CNH paper, analysts expect yields
on secondary market debt to start rising to reflect the higher
costs. For example, most investment grade paper trade around the
3 percent mark.
A series of downgrades on the prospects for the Chinese
economy and expectations of a weaker yuan implied by the
non-deliverable forwards (NDF) markets have also dented investor
appetites for Chinese assets.
That will make things difficult for new new issues. China's
Ministry of Finance is set to offer 23 billion yuan ($3.75
billion) in dim sum bonds this year in two tranches, according
to government announcements. About 13 billion yuan of an
institutional tranche will be on offer from June 26.
While bank syndicate desks last week were expecting the
3-year bond sale to price around the 2 percent mark, comparable
paper on Thursday was quoted well above the 2.5 percent level.
'Even the success of the MOF's bond sale is not a given as
the cost of funding has risen sharply,' said a credit trader at
a European Bank.
Chinese companies will be hurt by higher funding costs, and
even offshore firms will not be spared as a rise in yuan
borrowing rates could make it cheaper to borrow in U.S. dollar
This week, two foreign companies - India's ICICI Bank and U.S. based Caterpillar Inc - tapped the
quiet offshore market. Analysts says that now, after U.S.
Federal Reserve Chairman Ben Bernanke confirmed it would begin
reducing its stimulus, market interest rates are set to rise.
'Maybe there will be some demand for shorter-dated paper,
but foreign issuers should be prepared to cough up a decent
premium to get their bonds sold in the coming weeks after
Bernanke's testimony,' said a trader.
WEEK IN REVIEW:
- Standard Chartered is planning to sell a 1 billion yuan
bond in Taiwan, two brokerage sources familiar with the matter
said on Wednesday. The Asia-focused bank plans to target retail
investors. The three-year issue would be the second by a
foreign bank, following one by Deutsche Bank, which priced a 1
billion yuan bond at a 2.45 percent coupon rate earlier in June.
- Taiwan is expected to ease restrictions on selling bonds
denominated in the Chinese currency as it attempts to become
another offshore yuan trading hub after Hong Kong and Singapore.
According to Financial Supervisory Commission sources, Taiwan
will waive two requirements: one now saying companies need
credit ratings before offering yuan bonds and another that
foreign firms selling such bonds to local institutional
investors be publicly listed on an overseas exchange.
- The average volume of yuan traded each day in Hong Kong in
May hit a record and exceeded the volume of Hong Kong dollars
for the first time, indicating the yuan's growing importance in
- Average daily yuan trading volume rose to a record 390
billion yuan ($63.61 billion) last month in Hong Kong. The
average volume of Hong Kong dollars traded daily was 487 billion
Hong Kong dollars ($62.79 billion), data from the Hong Kong
Monetary Authority showed.
CHART OF THE WEEK:
Performance of Asian local bonds and CNH debt: http://link.reuters.com/hat38t
As Asian local currency bonds have been dragged into a
spreading emerging market selloff in recent weeks, even CNH debt
hasn't been spared. An index for measuring CNH bond performance
has declined since a peak in early May. But given the relative
illiquidity of the market, it has fared better than a regional
index for these bonds.
CNH Tracker-New jumbo bond sale lined up for stormy market:
Yuan trade eclipses HK dollars for 1st time
Taiwan to take steps to lure yuan deals
More stories about the CNH market
Daily onshore yuan reports
Daily China money market reports
Offshore yuan rate Onshore yuan rate
Offshore yuan dealt Onshore yuan on CFETS
THOMSON REUTERS SPEED GUIDES
($1 = 6.1269 Chinese yuan)
($1 = 7.7562 Hong Kong dollars)
(Editing by Richard Borsuk)
Keywords: MARKETS OFFSHORE/YUAN
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