Mainland debt proves a good investment

By Sonja Cheung (China Daily)
Updated: 2010-11-25 08:01
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HONG KONG - Mainland bonds sold in Hong Kong rallied more than debt from the biggest developing nations in the past three months, as international investors snapped up the securities to benefit from expected appreciation of the yuan.

The yield on the government's 3.3 percent offshore bond maturing in October 2014 fell 22 basis points to 2.91 percent, while that for similar-maturity debt onshore climbed 92 basis points, according to data compiled by Bloomberg.

Rates on Russian, Indian and Brazilian securities rose in the period. The yield on notes due in July 2012 issued by Hopewell Highway Infrastructure Ltd, which is controlled by Hong Kong billionaire Gordon Wu, dropped 62 basis points to 2.18 percent.

Expectations for the fastest currency gains among the so- called BRIC nations of Brazil, Russia, India and China are adding to the allure of yuan assets, even as Chinese regulators tighten limits on fund inflows.

New issuance will help drive up the average daily turnover of so-called dim sum bonds as much as six-fold to 300 million yuan ($45 million) by the end of 2011, from 50 million yuan this month, according to Standard Chartered Plc.

International Finance Corp, the World Bank's private investment arm, plans to sell about 100 million yuan of five-year bonds in Hong Kong, Nina Shapiro, the agency's treasurer, said last month.

The yield on China's 3.69 percent government bond maturing in September 2013 has risen 43 basis points to 2.77 percent in the past three months in Shanghai. Bonds slumped after the central bank raised its benchmark one-year lending and deposit rates by a quarter of a percentage point on Oct 19 to contain inflation. Consumer prices rose 4.4 percent from a year earlier in October, the biggest gain since September 2008.

The rate on Brazil's similar-maturity debt rose 117 basis points in the same period to 12.64 percent, Russia's climbed 17 basis points to 6.94 percent, and India's rose 8 basis points to 7.41 percent, according to data compiled by Bloomberg.

The mainland bonds offer better returns than yuan deposits in Hong Kong, making them popular with individual investors. HSBC, which controls two of the city's three biggest banks, offers interest of 0.71 percent on deposits of 500,000 yuan or less placed with it for 12 months. Edward Cheung, a 27-year old nurse, said he bought mainland offshore notes in September.

"The return on yuan bonds was higher than that on other renminbi products at the time," he said in an interview on Tuesday. "Getting a return of more than 2 percent is pretty good and risk is low. I have confidence in my investment."

Demand for yuan assets from investors seeking long-term gains is so strong it may hamper the development of markets for such debt, said Frances Cheung, a Hong Kong-based senior strategist for Asia excluding Japan at Credit Agricole CIB, a unit of France's second-biggest bank by assets.

"New dim sum bond issuance, especially from the likes of China, will help boost primary-market activity, but secondary-market trading depends on the mindset of bond investors who have adopted a 'buy and hold' strategy," she said. "The secondary market is very illiquid, it's really very lopsided with more buyers than sellers and this is unlikely to change."

The government's new 10-year yuan bond will help set a benchmark in Hong Kong and make the market more active, Shou Fugang, chief executive officer at Bank of Communications Co (Hong Kong), which is administering the sale, told a press conference on Monday. The Hong Kong Monetary Authority said the sale will use its Central Moneymarkets Unit.

Bloomberg News

(China Daily 11/25/2010 page17)