ABC International Holdings Ltd, a unit of China's third-largest bank, plans to hire more traders for yuan bonds in Hong Kong. [File Photo]

ABC International Holdings Ltd, a unit of China's third-largest bank, plans to hire more traders for yuan bonds in Hong Kong, betting issuance will rise further after tripling in two years to a record in 2012.

The overseas investment banking arm of Agricultural Bank of China Ltd is seeking a bigger share of the Dim Sum debt market after climbing to the fifth rank among underwriters this year from No. 10 in 2012, according to data compiled by Bloomberg News.

Yuan debt sales, excluding certificates of deposits, are set to surpass last year's 112 billion yuan (US$18 billion), with more state-owned companies tapping the offshore market, the Chinese lender predicts.

"Our primary market business has pretty good momentum now, so we wish to build up our secondary trading capability," said Richard Zhang, executive director of global capital markets at ABC International in Hong Kong. "The pipeline is pretty good for us. We'll have a number of deals in the first half. Those are state-owned enterprises with backing from the National Development and Reform Committee."

Yuan clearing banks were appointed in Taiwan and Singapore in the past two months to promote use of the currency in global trade as it seeks to stop growing its US$3.3 trillion foreign reserves, the world's largest. The average yield for Dim Sum company debt was 4.12 percent, compared with 5.01 percent in the onshore market and 2.72 percent for global corporates selling debt in dollars, according to Bank of America Merrill Lynch indexes.

Boosting appeal

Investors have stepped up bets on yuan appreciation as China's economy recovers, boosting the appeal of holdings in the currency. Exports from the world's second-largest economy rose 25 percent in January from a year earlier, the most since April 2011, official data showed on February 8. Manufacturing industries expanded for a fourth month, according to a February 1 report.

The yuan will strengthen 2.2 percent this year to 6.1 per dollar, according to the median estimate in a Bloomberg News survey of analysts. That would be more than twice the appreciation in 2012. The currency was at 6.2325 per dollar in Shanghai, before Chinese financial markets shut for the whole of last week for the lunar New Year holiday. In Hong Kong's offshore market, the spot slipped 0.1 percent to 6.2168 last week. Twelve-month non-deliverable forwards fell 0.1 percent to 6.3115 per dollar, a 1.3 percent discount to the onshore rate.

The pool of yuan savings in Hong Kong jumped 32 billion yuan in December, the biggest increase since August 2011, Hong Kong Monetary Authority data showed. The holdings totaled 603 billion yuan at the end of last year, compared with a record 627 billion yuan in November 2011.

"The return of yuan-gain expectations drives demand for yuan-related assets," Kelvin Lau, a Hong Kong-based economist at Standard Chartered Plc, said on February 15. "An appreciating yuan will also attract more companies to settle trade in the currency."

Corporate Dim Sum yields fell 91 basis points in the past year, Bank of America data show. Sales have risen from 36 billion yuan in 2010, according to the Hong Kong Monetary Authority.

Chinese Vice Premier Li Keqiang pledged in August 2011 to allow domestic companies to directly sell yuan bonds in Hong Kong without setting up offshore vehicles. The NDRC holds the right to approve fundraising plans of state-owned enterprises. It allowed 10 banks to sell 25 billion yuan of Dim Sum notes in January 2012 and four non-financial companies to issue in April 2012.

Issuance quota

China Guangdong Nuclear Power Holdings Co sold 1.5 billion yuan of bonds in Hong Kong at 3.75 percent on January 7. The yield on the notes due 2015 was 3.55 percent on February 15. ABC International was one of the underwriters of this deal.

"This year's sales are likely to surpass last year's," Zhang said on February 6. "The NDRC, which has the right to allocate issuance quota, will adjust their strategy to be more in line with the market. From this year onward, it's likely the NDRC will allow state-owned enterprises at local levels or even private enterprises to sell."

Worldwide yuan usage is increasing, according to a Standard Chartered Renminbi Globalization Index. The gauge reached a record 748 in December, a 50 percent jump from 498 a year ago, with London, Taiwan and Singapore set to join Hong Kong as offshore trading hubs for the Chinese currency.

The People's Bank of China has approved Industrial and Commercial Bank of China's Singapore branch as the yuan clearing bank in the city-state. That broke the grip on offshore yuan settlements of Bank of China Ltd, the designated agent in Hong Kong, Macau and Taiwan.

Taiwan started accepting deposits and conducting interbank trading in the yuan on February 6. The island's yuan savings, including those at offshore banking units, will increase to at least 100 billion yuan by the end of 2013, Standard Chartered estimates. Taiwan had 1.3 billion yuan of deposits as of February 6, official data showed.

"We are positive on yuan liquidity growth this year, which will help boost Dim Sum bond issuance," said Lau.

The cost of insuring China's sovereign bonds has rebounded from a two-year low. Five-year credit-default swaps protecting the nation's debt was at 65 basis points on February 14, from 56 on November 30, according to data provider CMA, which is owned by McGraw-Hill companies and compiles prices quoted by dealers in the privately negotiated market.

Expand trading team

"As big waves wash the sands, investors have become more selective on credits now," Zhang said. "If the renminbi's exchange rate isn't stable or depreciates, that's going to hurt the Dim Sum bond market."

ABC International is planning to expand its trading team as global banks including Morgan Stanley and Bank of America Corp look to trim staff. Job cuts at Morgan Stanley would involve 55 to 60 bankers in the Asia-Pacific region excluding Japan, insiders said last month. Bank of America pared staff by 14,601 employees last year.

The Chinese lender aims to start underwriting dollar-denominated bonds for mainland companies in the second quarter, Zhang said. Chinese and Hong Kong borrowers sold almost seven times more undated or unrated debt in January than a month earlier.

"In terms of fixed-income platform, we have hiring plans for sales and trading," Zhang said. "We aren't looking for drastic expansion for deal origination for now, but I don't rule out more headcount if business gets better."