Reuters: US Dollar Report: CNH Tracker-Stronger currency enhances appetite for dim sum

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CNH Tracker-Stronger currency enhances appetite for dim sum May 16th 2013, 06:02 Thu May 16, 2013 2:02am EDT By Saikat Chatterjee HONG KONG, May 16 (Reuters) - Despite recent volatility in the offshore yuan market, the demand for bonds denominated in the Chinese currency is likely to remain strong as the yuan's appreciation trend looks intact. An HSBC index measuring total returns in the dim sum bond market has gained more than 1.5 percent this year. That beats returns in the Chinese onshore bond market by more than one percentage point and is about even with how Hong Kong's generally weak stock market has fared in 2013. Since the start of April, returns on dim sum bonds have been boosted by the Chinese currency's solid performance in the face of a resurgent U.S. dollar even as other Asian currencies have remained broadly flat. The yuan has appreciated more than 1 percent against the dollar since the end of March. Market participants expect further yuan gains for two reasons. One, recent regulatory moves to clamp down on hot money flows being disguised as trade settlement have prompted analysts to believe that Beijing is laying the groundwork to widen the yuan's trading band soon, which may end up encouraging more inflows into China from companies looking to hedge their currency exposure. Two, the People's Bank of China has kept the trajectory of the yuan's rise intact by fixing the daily midpoint stronger than market forecasts amid recent weak data and some downgrades of growth forecasts for the Chinese economy. Prospects of more currency gains are encouraging investors to snap up fresh issuances. Chinese developer Yanlord Land Group this week sold an offshore renminbi bond amounting to 2 billion yuan at a yield of 5.38 percent, below an initial price guidance of 5.5 percent. It received orders worth more than 7 billion yuan, extending a streak of heavy demand for new issues, particularly high yield debt in the offshore yuan bond market. That has encouraged overseas investors who are wary of buying dim sum bonds directly to purchase U.S. dollar-denominated bonds in Asia and the Middle East and swap the exposure into the yuan via currency forwards. One such investor is Stratton Street Capital, a London-based fixed income fund, which is highly bullish on the yuan. "The Chinese currency may not be as undervalued as earlier but the fundamentals are strong and we expect it to gain 5-7 percent this year," Andy Seaman, Stratton's portfolio manager told Reuters. While this forecast is "far more" than the consensus view of 1-2 percent yuan appreciation, which he said "can be quite wrong when it comes to China." In two years, Stratton's assets under management have grown from less than $600 million to nearly $2 billion across its fixed income products and managed accounts. Its renminbi bond assets have increased from $47 million to $326 million. "One of the reasons why we don't invest directly in the dim sum space directly is the lack of rated paper and we don't like high yield debt at this stage of the economic cycle and we find better opportunities in the investment-grade space elsewhere," Seaman said. WEEK IN REVIEW: * Yunnan-based Highland Capital Management aims to raise 5 billion yuan in the first round for a fund focused on investing in companies in Southeast Asia that serve Chinese tourists and work in energy and natural resources. Yuan-denominated outbound direct investment by Chinese companies in 2012 was the equivalent to $4.96 billion, compared with $77.2 billion in total outbound foreign direct investment, according to central bank data. * Three fund houses got approvals under the RMB Qualified Foreign Institutional Investor (RQFII) quotas totaling 5 billion yuan last week, suggesting that authorities are finally starting to dish out more quotas. Two billion yuan each was awarded to China Asset Management and CSOP Asset Management while E Fund management received a 1 billion yuan quota. * JP Morgan became the latest bank to execute a cross border yuan transaction for a client after the company received a cross-border lending quota. China's central bank has started allowing a small number of foreign companies to lend their excess yuan fund in the onshore market to fund their overseas operations. * Regulators simplified rules governing foreign direct investment to boost market reform after Premier Li Keqiang called on government agencies to cut red tape and cancel unnecessary administrative approvals. China attracted $29.9 billion in foreign direct investment in the first three months of 2013, up 1.4 percent from a year earlier. CHART OF THE WEEK: Chart on banks FX purchases:Chinese financial institutions net purchased nearly 300 billion yuan worth of foreign currency in April, up from March's 236 billion yuan, suggesting that capital inflows were robust last month. FX purchases were greater than the sum of the trade surplus and FDI inflows in April, though they are is likely to drop in May due to the new regulations. RECENT STORIES: Weekly CNH Tracker:Chinese firm breaks ground with privately managed offshore yuan fund Bullish yuan herd leaves China fundamentals in the dust 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 THOMSON REUTERS SPEED GUIDES Link this Share this Digg this Email Reprints

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