China managed to sell $2.1 billion of yuan-denominated bonds in choppy market conditions in Hong Kong on Wednesday as fears of a Chinese credit crunch eased.
The 13 billion yuan sale comes at a particularly gut wrenching time for China's money market, where the central bank has deliberately engineered a liquidity squeeze to wean errant banks off riskier lending.
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While the cutoff yields in the latest sale were below the yields prevailing in the secondary market by the same issuer, it was well above ranges projected by analysts, reflecting the impact of the cash squeeze on renminbi asset yields.
"Overall, it was a mixed picture. While the central bank portion met with better demand than last time, on the institutional side it was slightly weaker." said Crystal Zhao, a strategist at HSBC in Hong Kong.
The 10 billion yuan ($1.63 billion) institutional auction was comprised of 5 billion yuan of three-year bonds at 2.87 percent, 2 billion yuan of five-year bonds at 3.02 percent, 1 billion yuan of seven-year bonds at 3.09 percent, 1 billion yuan of 10-year bonds at 3.16 percent, 500 million yuan of 15-year bonds at 3.6 percent and 500 million of 30-year bonds at 3.95 percent.
The 30-year bond sale was a novelty to the offshore yuan bond market, being the longest maturity to date, but it is unlikely to see a lot of follow-through issuers given the relative lack of demand for such a long tenor.
In an encouraging sign, the tranche of the bond sale reserved for central banks attracted good demand. The 3 billion yuan tranche received about 5.48 billion yuan of orders.
About eight central banks participated in the deal, with names from Asia, South America and Africa, according to Wei Zhong Zhang, general manager of global markets at Bank of Communications.
This was the "result of the growing internationalization of the yuan," Zhang said.
Nearly 15 percent of China's international trade is now settled in yuan compared to less than 1 percent four years ago, with major financial centers such as London, Singapore and Taiwan jostling to wrest a share of the growing offshore yuan business from industry leader Hong Kong.
The bonds were trading firmly in the secondary markets even as the cash squeeze in the offshore markets showed early signs of abating, traders said.
Some Chinese lenders have been borrowing in the offshore market to meet their onshore demand for funds.
This is the Ministry of Finance's fifth dim sum bond sale in the city.
It is offering bonds totaling 23 billion yuan this year, of which 13 billion yuan was sold on Wednesday. The remainder will be sold in the second half of the year.
Bank of Communications Hong Kong Branch is the issuing and lodging and fiscal agent.
China has sold dim sum bonds every year since 2009 - the year when it kicked off its yuan internationalization project and it typically uses these auctions to unveil some fresh reforms in the market.
Traders and bond syndicate desks said China will remit the proceeds from the bond sale back into the onshore market. ($1 = 6.1453 Chinese yuan)
($1 = 6.1453 Chinese yuan)
(Reporting by Saikat Chatterjee, Rachel Lee and Umesh Desai, and IFR's Nethelie Wong; Editing by Kim Coghill)