Hong Kong Record Negative Rates Fuel Yuan Demand

By Andrea Wong

Aug. 22 (Bloomberg) — Hong Kong bond yields are trailing inflation by the most on record, spurring demand for yuan- denominated assets as China makes it easier for the city’s residents to invest in the securities.

The yield on the city’s two-year government debt fell to a record 0.16 percent last week, from 0.64 percent at the start of 2011. That’s 5.44 percentage points less than the inflation rate, the biggest gap in Bloomberg data going back to March 1998. Ten- year yields fell 121 basis points this year to 1.66 percent. China’s 10-year yield rose four basis points to 3.89 percent. Hong Kong’s dollar is pegged to the greenback, which dropped 3.1 percent against the yuan this year.

The city’s investors are seeking to preserve their capital at a time when global recovery jitters are pummeling stocks and Barclays Plc predicts Hong Kong home prices will slide as much as 30 percent by the end of 2013. Yuan deposits in Hong Kong jumped six-fold in the year through June and investment options are growing after China last week sold yuan debt in the city and eased limits on buying securities in Shanghai and Shenzhen.

“All the perks China is giving Hong Kong come at a very opportune time as there’s a global stocks rout and property prices have already shot up a lot,” said Steve Wang, head of fixed-income research in Hong Kong at BOCI Securities, a unit of Bank of China Ltd. “The yuan is a very stable currency with steady gains and the credit quality of China’s sovereign debt is improving.”

Dim Sum Sale

China’s government drew orders of 69 billion yuan ($10.8 billion) for 15 billion yuan of debt sold last week in Hong Kong, paying the lowest yields on record even after inflation on the mainland accelerated to a three-year high of 6.5 percent in July.

Three-year bonds were sold to finance companies with a 0.6 percent yield, five-year notes at 1.4 percent, seven-year debt at 1.94 percent and 10-year securities at 2.36 percent. A 1.6 percent coupon was set for 5 billion yuan of two-year debt being sold to individual investors this month in Hong Kong, where inflation reached a three-year high of 5.6 percent in June.

China’s Vice Premier Li Keqiang, visiting Hong Kong at the time of last week’s sale of so-called dim sum bonds, said mainland companies will be able to sell 50 billion yuan of debt in Hong Kong this year and that China’s qualified foreign institutional investor program, known as QFII, will be expanded to allow 20 billion yuan of funds in the city to be invested in domestic securities.

Strengthening Yuan

Yuan deposits in Hong Kong amounted to a record 553.6 billion yuan at the end of June replica watches, up from 89.7 billion yuan a year earlier, official figures show.

The yuan reached a 17-year high of 6.3820 per dollar on Aug. 16 in Shanghai, and was trading at 6.3971 as of 1:07 p.m. in Shanghai, according to the China Foreign Exchange Trade System. It’s the best performing currency this month among Asia’s 10 most-used currencies excluding the yen and, according to a Bloomberg survey of analysts, is expected to appreciate 5.5 percent to 6.05 by the end of next year. Hong Kong’s dollar, the region’s worst-performing currency this year, is forecast to remain pegged through 2012, a separate poll shows.

Hong Kong’s investors are “desperately” seeking returns on safe investments as their currency faces “strong depreciation pressure,” said Ronald Wan, Hong Kong-based managing director at China Merchants Securities (Hong Kong) Co., part of the nation’s sixth-biggest brokerage. “The QFII program allows them to get higher interest rates offered by bond products on the mainland.”

Limited Options

Global investors, restricted from buying China’s domestic securities, have limited options to invest their yuan and are prepared to accept lower returns than their mainland counterparts on expectations a strengthening currency will deliver gains. The government’s 10-year bonds in Hong Kong sold on Aug. 17 were priced to yield 1.57 percentage points less than similar-maturity onshore debt auctioned the same day.

“Dim sum yields are not that high but demand from retail investors is very high,” said Tommy Ong, senior vice-president of treasury and markets at DBS Bank (Hong Kong) Ltd. “Investors, especially the general public, want to wait for clear signals that there’s no large-scale global recession before they make decisions to enter into riskier assets such as the stock and the property markets.”

Hong Kong home values, which surged 70 percent in the past two-and-a-half years and outperformed stocks in the city, are set for their biggest decline since Lehman Brothers Holdings Inc. collapsed in September 2008 as land supply increases and global growth slows, according to Barclays. The benchmark Hang Seng Index of shares has dropped more than 20 percent from a November high, the common definition of a so-called bear market.

‘Safe-Haven Asset’

Hong Kong’s yuan bonds offer investors a “new class of safe-haven asset,” BOCI Securities’ Wang wrote in a research note published on Aug. 17.

Demand for China’s assets is building even amid concerns the nation’s banks may need to be bailed out as loans to local governments’ financing units turn sour.

An official audit released in June estimated Chinese regional authorities’ financing units had 10.7 trillion yuan of liabilities at the end of last year of which 79 percent was lent by banks and 8 billion yuan was overdue. As much as 30 percent of loans to the entities may go bad, Standard & Poor’s said in April.

Five-year credit-default swaps to insure China’s debt against default touched 116 basis points on Aug. 11, the highest level since May 2009, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The swaps, which pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower renege on debt, ended last week at 112 basis points.

–With assistance from Kyoungwha Kim in Singapore and Yumi Teso in Bangkok. Editors: James Regan Replica Watches, Emma O’Brien

To contact the reporter on this story: Andrea Wong in Taipei at awong268@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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