Bloomberg News

Dim Sum Bonds Erase This Year’s Gain on Offshore Yuan Sell-off

September 28, 2011

Sept. 28 (Bloomberg) -- Yuan-denominated bonds in Hong Kong erased this year’s gains after Europe’s debt crisis prompted investors to flee emerging-market assets, triggering a record slide in China’s offshore exchange rate.

The HSBC Offshore Renminbi Bond Index dropped 0.3 percent yesterday to 99.96, dipping below its starting point of 100 for the first time since the gauge was introduced at the beginning of 2011. It peaked at 102.35 on May 31. The yuan tumbled 2.1 percent to 6.5120 per dollar in Hong Kong last week, sinking to a discount of as much as 1.9 percent to the level in Shanghai. That was the currency’s biggest drop since offshore trading commenced in July 2010.

“There were quite a number of stop-loss orders last week in the offshore yuan market on macro concerns,” said Nathan Chow, an economist in Hong Kong at DBS Group Holdings Ltd. “The dim sum bonds are largely foreign-exchange plays. The sell-off in offshore yuan has dragged down the bonds’ performance.”

The yuan strengthened 0.38 percent today to 6.4325 per dollar as of 11:33 a.m. in Hong Kong, after rebounding 0.85 percent in the past two days, Bloomberg data show. In the onshore market, the currency rose 0.14 percent to 6.3900 and the gap between the two rates narrowed to 0.63 percent.

The discount should prove temporary as China will continue to tame inflation with a stronger currency, said Chow. The People Bank’s of China set its daily reference rate 0.21 percent higher at 6.3623 per dollar today, the biggest gain in seven weeks and the strongest level since July 2005. The currency is allowed to trade up to 0.5 percent on either side of the fixing.

Inflation Fight

Consumer prices rose 6.2 percent in August from a year earlier following a 6.5 percent increase in July that was the largest in three years.

A more flexible exchange rate would help China slow growth to a more sustainable pace and bring inflation down, Bank of Canada Senior Deputy Governor Tiff Macklem said yesterday in Vancouver. China’s economic expansion this year may exceed 9 percent, Lu Zhongyuan, deputy director of the State Council Development Research Center, said in a statement distributed before a breifing in Beijing today.

The yuan will be “fully convertible” in five years should market reforms go smoothly, Li Daokui, an adviser to the People’s Bank of China, said Sept. 25 in Washington. The currency will strengthen to 6.06 per dollar by the end of 2012, according to the median estimate of 19 analysts surveyed by Bloomberg.

--Editors: James Regan, Sandy Hendry

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

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


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