August 29, 2017 / 9:03 AM / a year ago

China's Bond Connect trade picks up as yuan strengthens

SHANGHAI, Aug 29 (Reuters) - Trading by offshore investors in a type of short-term debt through China’s Bond Connect scheme rose sharply last week, suggesting that a strengthening yuan may be helping the two-month-old programme pick up steam after a slow start.

The total settlement value of Bond Connect transactions received by the Shanghai Clearing House, one of China’s two bond settlement systems, nearly quadrupled in the week of Aug. 21 to 11.8 billion yuan ($1.8 billion) from the week before, data from the Shanghai Clearing House showed on Tuesday.

Trade was concentrated in negotiable certificates of deposit (NCD), a type of short-term debt popular with smaller banks, accounting for more than 88 percent of settlement value.

High rates and a surging yuan may have piqued investor interest in NCDs, said Albert Leung, a Hong-Kong based rates strategist at Nomura.

“If you have the conviction that the RMB will trade O.K. in the next (one to three months) and the yields are high, it’s actually not a bad position to own, because first you get 4.5 percent yield and also you gain some potential currency appreciation,” Leung said, using another term for the yuan.

The short-term debt has drawn increasing attention from regulators trying to control banking system risk, as banks raised funds by issuing NCDs, effectively borrowing from each other in the the interbank market to get around tight conditions.

The yield on AAA-rated three-month NCDs stood at 4.53 percent on Monday - the most recent day for which the China Foreign Exchange Trade System has data - 89 basis points above the yield on 10-year treasuries on Monday.

As of midday Tuesday, the yuan had gained 1.8 percent against the dollar in August, and is on course for its best month since July 2005.

The Bond Connect scheme, launched on July 3, permits eligible institutional investors in Hong Kong and overseas to buy and sell onshore bonds without a quota through what is termed “Northbound” trade.

Billed as a mechanism to increase cooperation between mainland and Hong Kong capital markets, Bond Connect does not yet offer mainland investors access to offshore markets through “Southbound” trade.

Data from the Shanghai Clearing House is limited to trading of bonds cleared through the institution, and as such does not include forms of debt cleared through China Central Depository & Clearing Co. (CCDC), such as Chinese treasuries.

$1 = 6.6005 Chinese yuan Reporting by Andrew Galbraith; Editing by Jacqueline Wong

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