China's central bank sold its first-ever dim sum bond on Tuesday, placing a one-year issue in London with a yield of 3.10 percent and order books six times the amount it had planned to sell. Coinciding with a high-profile state visit to Britain by Chinese President Xi Jinping, the bond is effectively a gesture to fortify London's role as a non-Asian yuan trading centre .
The yield tightened to 3.15 percent from the initial 3.3 percent area when books opened, before selling at 3.10 percent, a term sheet seen by Reuters showed. Order books touched 30 billion yuan ($4.73 billion), compared with a planned issue size of 5 billion renminbi (RMB). "An order book in excess of 30 billion RMB is a great positive statement of support for the market," said Chris Jones, global head of local currency syndicate at HSBC.
"Given there has been some uncertainty over macro China in the past few months and offshore issuance has been light, it's great to see such a significant print," he said, adding the bank stuck to its usual one-year tenor rather than issuing three-year maturity more common for dim sum bonds, which are sold outside China but denominated in yuan. Asian investors took 51 percent of the bonds. The rest were almost equally split between European and U.S. buyers.
The bond will help set an offshore price for Chinese debt, said Jan Dehn, head of research at asset manager Ashmore. "This will ultimately beget other markets - once you get a sovereign curve abroad, then you can have credit default swaps and corporates pricing off that, and it all adds to the liquidity," Dehn said. The bond is not eligible for most international debt indexes, but yuan-denominated assets are in demand, as investors position themselves for the currency's growing use in trade and investment. The yuan already "ticks all the right boxes" for inclusion in the International Monetary Fund's Special Drawing Rights list of global reserve currencies, HSBC, the biggest international bank in China, said on Tuesday.
In a separate move, the Bank of China introduced an index to facilitate yuan bond trading in London. The bank said overseas investors hold 4.34 trillion yuan worth of Chinese assets, including almost 800 billion yuan in bonds. Aidan Yao, senior economist at Axa Investment Managers, said PBOC's London bond would help investors who lack quotas to directly buy onshore-listed yuan securities. Its yield is also in its favour. Onshore one-year yuan government bonds pay less than 2.5 percent and the 10-year yield is around 3 percent.
"Dim sum bonds are currently yielding higher than onshore bonds across the board," said Becky Liu, China rates strategist at Standard Chartered in Hong Kong. That is because of the higher cost of funding offshore yuan and recent redemptions from dedicated bond funds after China devalued the renminbi in August and increased the flexibility of its exchange rate mechanism, Liu added. "We expect dim sum bond yields to continue grinding in but likely staying a touch higher than onshore peers in the foreseeable future." Proceeds from the unrated fixed-rate note are intended to support the central bank's functions.
HSBC is one of the banks co-ordinating the deal for the PBOC, along with the Industrial and Commercial Bank of China (ICBC). The two banks, along with Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank and Standard Chartered, are joint bookrunners and lead managers.
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