The market for new "dim sum" bonds is suffering its longest barren spell as China's interbank liquidity crunch and concerns over US monetary policy wreak havoc on offshore renminbi debt.
A dim sum bond has not been priced since June 18, according to Dealogic, marking the first four-week period without a single deal since offshore borrowing in renminbi first began in 2010. There has also been a steep sell-off on the secondary market, with average yields rising from 4.35 percent to 5.71 percent at the end of May, according to data compiled by Bank of China.
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Appetite for offshore renminbi credit has been hit by a number of factors over recent weeks. In June, China's interbank lending market endured its worst-ever cash squeeze as the People's Bank of China held back from adding liquidity to the system. Borrowing costs spiked, sparking a sell-off in Chinese equities and raising concerns about the health of the financial sector. Some offshore subsidiaries of Chinese banks responded by shifting renminbi back over the border, sapping liquidity from the Hong Kong market.
"With the connectivity between onshore and offshore, the effects [of the squeeze] are being felt in Hong Kong as well," said Tee Choon Hong, head of offshore renminbi capital markets at Standard Chartered.
Like their mainland counterparts, banks in Hong Kong have also battled to secure renminbi by offering higher interest rates on deposits. Many investors have chosen to park cash in renminbi accounts and short-term certificates of deposit that offer higher returns than their dollar-based equivalents, but come without the price fluctuations of bonds.
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"The market volatility has provided some [investors with] excess liquidity with interesting opportunities in getting higher yields. Deposit rates have gone up quite sharply," said Mr Tee.
The global bond sell-off sparked by comments in late May from Ben Bernanke, chairman of the Federal Reserve, has also been a factor, as investors have withdrawn money from emerging market bond funds at a record pace. On Friday, Indonesian retailer Multipolar reopened Asia's high-yield dollar bond market – effectively shut since Mr Bernanke referred to the potential downsizing of asset purchases by the US central bank.
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Expectations that the renminbi will appreciate further, a key driver of demand for dim sum bonds, have also been dampened by China's falling growth rate and weak trade figures. Standard Chartered does not expect the renminbi to appreciate more than 0.25 percent over the rest of the year, while Deutsche Bank believes it will fall against the greenback.
As a relatively new product, dim sum bonds have been hampered by poor liquidity and lack of long-term investors. Central banks and insurers account for less than 10 percent of purchases in the primary market, according to HSBC.