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Dim sum market spurned by companies after yuan devaluation shock

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The dim sum bond market is inching closer to insignificance for corporate treasurers looking to raise Chinese yuan.

[BEIJING] The dim sum bond market is inching closer to insignificance for corporate treasurers looking to raise Chinese yuan.

There were only three corporate issuances of yuan debt in the offshore market this year, down from a record 73 two years ago, data compiled by Bloomberg show. Overall sales tumbled 49 per cent to 118.1 billion yuan (S$24 billion), with almost all the offerings by financial or sovereign issuers.

Even a slump in the notes' average yieldto a two-year low isn't attracting corporate fundraising, and Aberdeen Asset Management Plc says last year's surprise yuan devaluation shook some global funds.

"It will take time for international investors' confidence to return," said Tim Yip, Hong Kong-based head of cross-border renminbi business at HSBC Holdings Plc, the market's top arranger for six years. Yields are falling as Chinese investors less concerned with depreciation buy the debt, he said.

The People's Bank of China shocked the world by devaluing the yuan by 1.9 per cent in a single day in August 2015 and the currency has since lost a further 5.3 per cent.

While the average yield on Dim Sum bonds has tumbled to 3.86 per cent, down from a record high of 6.2 per cent in January, borrowing costs are still lower for issuers in Shanghai. The lack of a well-rounded offshore yuan bond market is a blow to China's efforts to increase the yuan's use in international trade.

"If you want to have a booming market, you need to have a healthy pipeline," said Edmund Goh, a Kuala Lumpur-based investment manager at Aberdeen Asset, which reduced Dim Sum holdings in recent months.

"It's very hard to see supply going up fast, and that's one of the reasons why demand outstrips supply and the market seems to be strong. Foreign investors will remain careful."

Pacific Investment Management Co in June forecast that Panda bonds, or onshore notes sold by foreign issuers, will eclipse dim sum securities as a means of yuan fundraising. Sales of the notes named after the bear native to China have surged to 60.8 billion yuan this year, almost five times that of the whole of 2015, Bloomberg-compiled data show.

The fortunes of Shanghai's bond market has perked up as authorities allowed more foreign investors into the interbank market. Global funds boosted holdings of onshore bonds by 47.7 billion yuan to 764 billion yuan in June, PBOC data show.

HSBC's Mr Yip sounded a word of caution on onshore issuance, pointing out the time consumed by preparing offer documents and getting regulatory approval.

"Panda bond issuers will not be opportunistic because you don't spend three to four months preparing documentation and then try to be opportunistic," said Yip.

Chong Qing Grain Group Co sold 1 billion yuan of three-year dim sum debt in July, while developer Fantasia Holdings Group Co raised a total of 1.6 billion yuan in two offerings this year.

Chong Qing Grain didn't reply to a fax seeking comment, while four calls and an e-mail to Fantasia's investor relations department went unanswered.

There have been 350 dim sum sales by financial companies in 2016, less than half the 815 of two years ago, while issuance by government entities dwindled to 39.

Banks like to sell offshore yuan notes because they can use the money overseas, said Ivan Chung, a Hong Kong-based associate managing director at Moody's Investors Service. The Central American Bank for Economic Integration is set to sell 700 million yuan of three-year offshore yuan notes at a coupon of 3.95 per cent.

The average Dim Sum yield fell this month as supply of the debt shrank and China was seen keeping the yuan steady before a Group of 20 meeting on Sept 4-5 in Hangzhou.

The yield premium for three-year offshore corporate debt versus similar onshore paper has narrowed to 89 basis points after widening to a record 334 on Feb 24, a Bank of China index shows.

"Interest from foreign investors in dim sum has cooled because of currency concerns," said Hong Kong-based Gordon Ip, who manages the US$1.9 billion Value Partners Group Ltd's Greater China High Yield Fund that returned 11 per cent this year.

BLOOMBERG