THE discount investors benefit from buying yuan in Hong Kong is disappearing as China's shift toward policies that support economic growth spurs demand for dim sum bonds.
The discount fell to 0.2 percent on Friday from a record 1.9 percent on September 23, according to data compiled by Bloomberg News. The yuan strengthened 0.5 percent this month in offshore trading after a 1.6 percent jump in October that was the biggest advance in a year. Yuan-denominated debt sold in Hong Kong rose in each of the last four weeks, the longest winning streak since May, according to the Deutsche Bank Offshore Renminbi Bond Index.
"As the China bears fade away, offshore yuan will soon return to a premium versus the onshore rate," said Nathan Chow, a Hong Kong-based economist at DBS Bank (Hong Kong) Ltd, a unit of Singapore's biggest lender. "China's economy is fundamentally strong. Demand for yuan continues to outstrip supply in the offshore market."
Premier Wen Jiabao said last month that policies will be "fine tuned" to protect Asia's biggest economy against global turmoil, spurring speculation two years of monetary tightening will start to be unwound. The government has since announced tax cuts for companies as well as increased credit for smaller businesses, while the central bank lowered its one-year bill yield for the first time since 2008 and injected 163 billion yuan (US$26 billion) of funds into the financial system.
China will remain the biggest contributor to global economic growth next year amid a deepening debt crisis in the eurozone, according to Bank of America Corp estimates. Gross domestic product will grow 8.6 percent in 2012, against 0.3 percent for the 17 nations that share the euro and 1.8 percent for the United States, the Organization for Economic Cooperation and Development has estimated.
Consumer prices rose 5.5 percent in October from a year earlier, the smallest gain in five months, the National Bureau of Statistics said last week. Producer prices climbed 5 percent, less than the 5.8 percent advance predicted by economists surveyed by Bloomberg News.
"With inflation easing lately, they have some room to use monetary policy to help the economy," said Hitoshi Ueda, senior fund manager of the fixed-income investment group at Sumitomo Mitsui Asset Management Co in Tokyo. "That is supportive of growth and will lead to a stable speed of yuan appreciation. We aim to benefit from that strengthening."
Sumitomo Mitsui managed assets of about US$130 billion at the end of August and Ueda said its holdings include dim sum bonds and China's domestic debt.
Gain to continue
The onshore rate for the yuan has gained 0.19 percent this month after adding 0.5 percent in October.
China has indicated a willingness "to let the appreciation continue in the months and years to come," International Monetary Fund Managing Director Christine Lagarde said last Thursday in Beijing, after meeting officials including People's Bank of China Governor Zhou Xiaochuan and Vice Premier Wang Qishan.
The currency will climb 4.3 percent to 6.08 per dollar in Shanghai by the end of next year, according to the median estimate of 18 analysts surveyed by Bloomberg News.
The average yield on dim sum bonds fell to 3.68 percent on Thursday from a record 3.95 percent on October 7, based on the Deutsche Bank Offshore Renminbi Bond Index.
The rally in the securities may slow as Europe's debt crisis hurts exports, deterring policy makers from allowing yuan gains, said Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong. Overseas sales rose 15.9 percent in October from a year earlier, the least since February, trade data showed last Thursday.