The nascent offshore yuan market's growth in Hong Kong has been rapid, but its shortcomings are giving rise to a synthetic sister that may grow even more quickly.
Companies and institutions have been steadily queuing to issue yuan-denominated debt in Hong Kong, nicknamed "dim sum bonds", at very low cost, thanks to investors of all stripes willing to accept low yields in return for direct exposure to a currency expected to strengthen this year.
For the borrowers, though, getting the yuan back into China can be a lengthy, complicated process, especially with Beijing getting more hawkish against hot money. Plus, the limited pool of yuan in Hong Kong, while growing, has prevented borrowers from pushing big deals through the market. Synthetic yuan bonds may be the answer to non-investment grade companies looking to raise funds to bring into China, such as Chinese property developers.
At the same time, the bonds meet the heavy demand for yuan assets among international investors. The hybrid structure of these securities means investors are paid renminbi for lending borrowers US dollars. So the potential pool of investors expands to include anyone with dollars to invest. "Synthetic bonds are riding on the wave of investors migrating their assets from US dollars to renminbi," said a banker who worked on Evergrande Real Estate Group's jumbo 9.25 billion yuan ($1.41 billion) synthetic deal that priced last week.
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