Flight to safety whets appetite for Chinese dim sum

Undeterred by the turmoil in global financial markets, the Chinese government is throwing its weight behind the nascent offshore renminbi market with plans to auction a massive Rmb20 billion ($3.1 billion) dim sum bond, its biggest to date.

The bonds, issued by China’s Ministry of Finance (MoF), are planned for next week and will be divided between a Rmb15 billion institutional tranche and a Rmb5 billion retail tranche. Bank of Communications (HK), the lodging agent for the institutional tranche, organised an investor lunch in Hong Kong on Monday this week.

Bank of China (HK) and HSBC are joint global coordinators and arrangers for the retail tranche. The Hong Kong branches of Agricultural Bank of China and Bank of Communications, CCB Asia, ICBC Asia and Standard Chartered Bank are also joint arrangers for the retail bond.

Amid a flight to safety, ironically, the finance ministry’s dim sum bond could benefit from investors searching for (relatively) safe places to park their money.

“The MoF bond auction should be well received. Dim sum investors have been quick to flee the moment markets turn risky, but the MoF is really setting a benchmark here and there is little credit risk involved,” said Chia Woon Khien, managing director of local markets strategy at Royal Bank of Scotland. “It is quite reassuring for the Ministry of Finance to come in and stabilise the market and the bond auction should also help to develop the swap curve.”

Certainly, global investors are hungry for safe-haven instruments. This is borne out by the peculiarly strong rally in US Treasuries, despite ratings agency Standard & Poor’s downgrade of the US sovereign rating from AAA to AA+ last Friday.

In contrast, global stockmarkets have slumped and credit spreads have moved wider. The iTraxx Asia Investment Grade Index — a credit default swap index that measures the cost of protecting investors owning bonds against default — has gapped out from 131bp/134bp last Friday to 151bp/154bp yesterday morning.

The auction is the finance ministry’s third dim sum bond and it is expected to set a benchmark for a slew of Chinese banks and companies that are waiting to tap the market. The institutional tranche comprises a Rmb6 billion three-year piece, a Rmb5 billion five-year piece, a Rmb3 billion seven-year piece and an Rmb1 billion 10-year bond. The auction will be held on August 17 from 9am to 10am.

The Rmb5 billion two-year retail bond will be auctioned from August 18 to 31. Unlike Hong Kong’s recent inflation-linked retail bond, investors will not need a Hong Kong identity card to participate — effectively opening up the bonds to anyone.

Away from the dim sum market, Hyundai Motors has mandated Bank of America Merrill Lynch, BNP Paribas, HSBC, J.P. Morgan and Morgan Stanley for a dollar benchmark. However, like many other deals, the company is waiting for market conditions to stabilise.