MNI:Dim Sums Seen Multiplying As Attractive Rates Lure Issuers

Hong Kong’s offshore yuan bond market is set to multiply in size over the next few years, likely prompting the authorities to expand the southbound Bond Connect programme to boost liquidity, policy advisors and economists told MNI.

Dim Sum issuance could exceed CNY1.5 trillion by 2025, said Liu Ying, senior fellow at the Chongyang Institute for Financial Studies at Renmin University of China, adding that this would push Chinese regulators to double the current CNY500 billion annual limit of southbound Bond Connect, which allows mainland investors to access the territory.

Hong Kong yuan bond issuance has already reached CNY400 billion so far this year, up from CNY330 billion in all of 2022, which in turn doubled 2021’s level, Hong Kong Monetary Authority data shows. This growth has been propelled since 2019 thanks to China-U.S interest-rate differentials, together with growing issuance by the Chinese government and the People’s Bank of China, and the launch of the southbound Bond Connect, Liu said.

Foreign borrowers, particularly financial institutions, have also increased Dim Sum issuance in recent years, with volume surging 134% in 2022 to CNY128 billion, she added.

ATTRACTIVE FUNDING

Funding costs below 4% make Dim Sums attractive to financial institutions, which account for about half the market, while newer bonds bear longer maturities than previous debt which tended to be for less than three years, said Yang Junhao, vice president at China Chengxin (Asia Pacific) Credit Ratings. Together with financial institutions, issuers also include Chinese local government funding vehicles and property developers, Yang noted.

More Chinese firms will tap Dim Sums as risks ease in the country’s property market and yuan internationalisation continues, Yang said, pointing to an agreement in October between China’s National Development and Reform Commission and the HKMA, which pledged to make it easier for domestic companies to issue yuan bonds in the offshore market. But regulators should allow more domestic banks and financial institutions to trade via Bond Connect to boost liquidity and lower funding costs, he added.

Hong Kong authorities should also expand preferential tax to cover more bond issuers, Yang added, noting that the city faces competition from other offshore yuan bond markets and robust mainland Panda issuance. (See MNI INTERVIEW: Wider Yuan Use Needs More Assets, Offshore Hubs)

BOOST FOR YUAN ROLE

Increased Dim Sum borrowing by Chinese local governments shows the determination of authorities in both Beijing and Hong Kong to expand the market as they push for a greater role for the yuan in the global financial system, said Steve Wang, executive vice president at the Hong Kong Institute of International Finance and former managing director at Bank of China International. Chinese Treasury bond sales are sketching out a yield curve to set a benchmark for other issuance, he noted, though he cautioned that private sector appetite for raising bonds in yuan was less certain and that exchange rate moves are likely to feed volatility in issuance. (See MNI: China Seen Boosting Swap Connect As CNY Bond Demand Grows)

China’s Ministry of Finance has sold a record CNY50 billion of mainly longer tenor treasuries in Hong Kong this year, while some eastern local governments, such as Shenzhen and Hainan, have issued green bonds, HKMA data shows.

The People’s Bank of China’s circa CNY44 trillion of currency swaps with other central banks will also support overseas liquidity and the growth of offshore yuan bonds, Liu said, pointing to the central bank’s upsized swap with the HKMA, which it increased to CNY800 billion from CNY500 million last year.

However, the market still requires bond derivatives to further boost trade, Liu noted, though she added that the current unsettled state of global markets and the capacity of Chinese regulators may mean these take some time to develop.