CNH TRACKER

'DIM SUM' BONDS RESILIENT AMID VOLATILE MARKETS

BY NETHELIE WONG AND M ICHELLE CHEN
HONG KONG, AUGUST 12 2011
Offshore yuan bonds have held up remarkably well over the past week despite a surge in global market volatility, suggesting expected renminbi appreciation and investors' need for portfolio diversification have made them a small haven. Apprehensive traders who worried that the violent moves in financial markets this week would spark a selloff in the so-called "dim sum" bond market were greatly relieved that these bonds traded in a narrow range or in some cases even posted gains. China's government bonds denominated in offshore yuan -- widely considered to be a benchmark for this market -- were among the most actively traded with yields on its 2013, 2015 and 2020 bonds trading two to three basis points lower on the week. "(Dim sum) bonds did quite well given the overall market volatility. While institutional money and banks largely stayed away, there was good demand from private banks and high net worth individuals," said a fund manager who oversees an Asian bond fund that has offshore yuan holdings. Daily volatility of the more liquid dim sum bonds has been roughly 5 bps this week, which is low compared with, for example, Indonesia, where bonds have traded in a 20-30 bps range. The pool of offshore yuan in Hong Kong has been growing, but at 550 billion yuan, it is still tiny compared to the depth of other Asian local currency bond markets. Overall volume in the secondary market for offshore yuan bonds was thin with very few sellers because many investors preferred to ride out the week by holding on to their existing bonds, though some were buying more, traders said. Bonds from major state-owned enterprises and global companies were confined within narrow price ranges. For example, China Resources Power <0836.HK> 3.75 percent bond due in November 2015 was quoted around 3 percent while Caterpillar's <CAT.N> 1.35 percent due July 2013 was around 1.4 percent, broadly unchanged over the week. Beijing's decision to move the yuan's midpoint higher by 0.7 percent in a week has raised speculation that authorities may be cranking up the pace of yuan appreciation after letting it stagnate for months. That may have also contributed to the solid performance of dim sum bonds. The moves in the midpoint fixing break historical precedent, Gavekal strategists said. Previously in times of tension in international markets, China's default reaction has been to "freeze like a deer in headlights and prevent any currency appreciation at all costs ," they said in a note. The solid performance of dim sum bonds should push investors to make a beeline for the Chinese Ministry of Finance's jumbo 20 billion yuan ($3.13 billion) offer next week.

CHART OF THE WEEK

Profile of CNH bond issuers: http://link.reuters.com/wuj23s As the volume of outstsanding offshore yuan bonds inches closer to the 200 billion yuan mark, Chinese banks and companies in the mainland and Hong Kong have cornered the market, accounting for more than 70 percent of total issuance.

LEAGUE TABLES
YTD Dim sum bond issuance
Bookrunner Amount Rmb (m) 22,452.5 11,508.8 6,694.3 5,563.5 5,200.0 % 41 23 11 11 5 HSBC Holdings PLC Standard Chartered PLC Deutsche Bank AG RBS JP Morgan

Chinese banks corner dim sum market

Data for 2010 2011 YTD
Others* 10.1% Foreign banks & non-financial banking institutions 7.3%

Based on Thomson Reuters data as of August 11, 2011

YTD synthetic RMB bond issuance:

Chinese banks 41.5%

Chinese policy banks 9.9%

Bookrunner

Amount Rmb (m)

% 4 2 1 1 2

Chinese & Hong Kong companies 31.2%

*Includes sovereign banks, multinational corporations and supranationals. Source: Standard Chartered Bank Reuters graphic/Christine Chan 10/08/11

Deutsche Bank AG 4,679.2 Citi 2,912.5 Bank of China Ltd 2,312.5 Bank of America Merrill Lynch 2,312.5 HSBC Holdings PLC 1,248.5
Based on Thomson Reuters data as of August 11, 2011

Thomson Reuters 2011

CNH TRACKER
WEEK IN REVIEW
Spot trading in offshore yuan this week surged, and the premium of offshore yuan over its mainland counterpart widened to the most in three months after the People's Bank of China fixed a series of record high midpoints this week, signalling more gains ahead. China's Ministry of Finance held a roadshow on Monday for its third dim sum bond in Hong Kong. In a first, high level officials like Vice Premier Li Keqiang and heads from the five big banks in China will attend a ceremony next week demonstrating the government's firm support for yuan internationalization. The Hong Kong Stock Exchange <0388.HK> said it will introduce a platform, called the Trading Support Facility, this year to facilitate trading in yuan-denominated shares in the secondary market. The sole RMB-denominated issue, Hui Xian REIT <87001.HK>, has seen light trading since shares listed in April this year. On deal street, New Focus Auto Tech Holdings <0360.HK>, a manufacturer and distributor of automotive electronics and powerrelated parts and accessories, is about to make its debut via a 200 million yuan bond deal at a yield of 3.75 percent. Hong Kong-listed Pharmaceutical firm United Laboratories International Holdings Ltd <3933.HK> is seeking a one billion yuan three-year amortising term loan. A number of banks was last heard to be bidding for the loan.

(Additional reporting by Saikat Chatterjee, Vikram Subhedar and Jacquelie Poh at Basis Point)
For feedback or more information on CNH coverage, contact Saikat Chatterjee at saikat.chatterjee@thomsonreuters.com or +852-2843-6548

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Thomson Reuters 2011