By Michelle Chen
HONG KONG, Aug 22 (Reuters) - Record high swap rates in the
offshore yuan market in Hong Kong, boosted by a lack of bond
issuance and a recent credit squeeze on the mainland, are set to
drop as foreign issuers of dim sum bonds begin fund-raising
after the summer lull.
A cross currency swap (CCS), a financial instrument that
allows participants to exchange both principals and interest
payments denominated in two different currencies, is a favourite
tool of foreign bond issuers for cheaper funding.
The jump in CCS rates was largely due to a lack of offshore
yuan bond issuance, which would have brought in a large amount
of hedging flows and pressed down the curve, analysts said.
The dim sum bond market experienced a rare barren patch with
only a few small issues sold in Hong Kong in the past few months
due to higher borrowing costs and worries about potential
A rare cash crunch in the onshore money market engineered by
the People's Bank of China (PBOC) in June had also forced some
players to the dollar market for funding, instead. They swapped
the proceeds to yuan in the CCS market, pushing up its rates.
China's short-term interest rates shot to as high as 30
percent in late June after the PBOC refused to increase money
supply, widely seen as a warning to banks to crack down on risky
The CCS rates have risen so much that at current levels for
5-year and longer tenors, borrowing offshore does not offer any
cost savings relative to onshore corporate funding for high
grade corporations, Deutsche Bank said.
"With the CNH CCS curve having steepened to the highest
level over the past 12 months, we feel the balance of risks does
not sustain further steepening at the long-end," said Liu Linan,
a strategist at Deutsche Bank in a recent report.
Three-year CNH CCS traded at 2.42 percent
on Thursday, rebounding from a one-year low of 1.25 percent in
May and hovering around an all-time high of 2.44 percent seen on
With more fund flows set to be swapped to dollars from dim
sum bond issuers in the coming weeks and less to be swapped into
yuan from overseas dollar funding, the CNH CCS rate is expected
to edge down from record highs.
That said, a sword of Damocles hanging over the market is
the prospect of a cut in stimulus by the U.S. Federal Reserve as
early as in September, which has already caused jitters and
capital outflows in emerging markets including China.
Investors are bracing for the time when the Fed will start
to slow its $85 billion in monthly asset purchases. A
faster-than-expected pace of tapering bond purchases could lead
to a spike in U.S. interest rates and subsequent volatility in
cross currency swaps.
WEEK IN REVIEW:
* The Hong Kong Monetary Authority (HKMA) said on Monday it
would slightly lower the throughput targets and lengthen the
period to reach the targets to improve interbank yuan settlement
arrangements in the real time gross settlement system (RTGS).
* The Bank of East Asia said on Tuesday it had been approved
as a Renminbi Qualified Foreign Institutional Investor (RQFII).
The bank will use the RQFII quota for its own investment to
enhance returns on its RMB funds.
* Yuan deposits in Standard Chartered Bank recorded a 40
percent year-on-year increase by the end of July, said Teddy
Wong, the bank's head of deposits and secured lending for Hong
Kong and Greater China. Wong expected yuan deposit rates in Hong
Kong to remain stable at 2.5-3 percent for the rest of the year.
* Yuan deposits taken by Taiwan's domestic banking units
(DBU) and overseas banking units (OBU) reached 46.6 billion yuan
($7.6 billion) and 30.3 billion yuan, respectively, by the end
of July, statistics from Taiwan's central bank show.
* Deutsche Bank said on Wednesday it would launch paperless
cross-border payment services in China via its electronic
banking platform on Sept. 1, enabling corporates to process
their payments and foreign exchange transactions electronically.
CHART OF THE WEEK:
Long-end CNH cross currency swap rates hover around record
CNH Tracker-Red tape hinders Qianhai cross-border yuan loan
China wants fewer curbs in free trade zones to lure foreign
More stories about the CNH market
Daily onshore yuan reports
Daily China money market reports
Offshore yuan rate Onshore yuan rate
Offshore yuan dealt Onshore yuan on CFETS
Offshore yuan bonds
THOMSON REUTERS SPEED GUIDES
($1 = 6.1234 Chinese yuan)
(Editing by Editing by Jacqueline Wong)
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