Dim Sum Bonds, Hang Seng Index, Hong Kong Dollar Exchange Rate, CNH
Bond market: The debt restructuring of real estate enterprises in March drove the growth of Chinese dollar bond issuance, and the maturity of real estate and urban investment dollar bonds will face a small peak in June, and the secondary market continued to rebound, with high-yield grades outperforming investment grades for five consecutive months. As the inversion of the interest rate gap between China and the United States deepened, the cost advantage of offshore RMB financing was further highlighted, with the issuance of offshore RMB corporate bonds reaching a record high in March and the first quarter, and the issuance of urban investment entities continued to expand. The scale of north-south custody under Bond Connect continued to grow.
Stock market: In March, the issuance activities of the primary market of Hong Kong stocks remained weak, and the scale of fundraising of the Hong Kong Stock Exchange fell to the tenth place in the world in the first quarter. There is uncertainty about the pace of interest rate cuts by the Federal Reserve, and the overall market of Hong Kong stocks will still be driven by the mainland's fundamentals and the recovery of corporate earnings.
Forex: Under the influence of the inter-quarter, the overall liquidity of the Hong Kong dollar tightened in March, and the decline in the Hong Kong dollar Hibor in early April caused the interest rate differential between the United States and Hong Kong to widen again to the highest level since September 2023. The US dollar remained strong during the month, and the offshore RMB exchange rate was under pressure overall. Since the end of March, CNH Hibor has risen seasonally, and the use of offshore RMB day repo agreements by the Hong Kong Monetary Authority (HKMA) has increased.
Review of the macro situation
Hong Kong's economic fundamentals have recovered steadily, and business sentiment has picked up. Hong Kong's tourism industry recovered strongly in the first quarter, with 4 million visitors to Hong Kong recorded in February driven by the Spring Festival holiday, and the total number of visitors from January to February was about 7.83 million, a three-fold year-on-year increase, and the preliminary statistics of visitor arrivals to Hong Kong in the first quarter were about 11.23 million, a year-on-year increase of 1.5 times, an increase of 5.1% over the fourth quarter of 2023. Imports and exports are growing restoratively. Affected by the base of the staggered month of the Spring Festival, the value of Hong Kong's merchandise exports and imports in February fell by 0.8% and 1.8% year-on-year respectively, but from January to February this year, the value of exports and imports still rose by 16.6% and 9.7% year-on-year respectively. The economic boom has picked up, but there are hidden worries. Hong Kong's S&P PMI rose to 50.9 in March, up 1.2 percentage points month-on-month, returning to expansionary levels after being in contraction territory for two consecutive months. According to the S&P survey, new orders from the private sector rose for the first time this year, with the construction sector seeing the most prominent growth, while Hong Kong's employment rate rose by the highest level in nearly a year in March, supported by the creation of more jobs in Hong Kong's private sector. However, with the volume of new business from overseas and mainland China continuing to shrink and the decline widening, and the overall business sentiment survey remains pessimistic, companies are generally worried that the economic downturn and intensified competition will further impact sales in the coming year.
The property market transactions continue to grow, and residential property prices are expected to remain low. In March, the number of residential property transactions in Hong Kong surged by more than 67% month-on-month to a 10-month high, while it still fell by about 41% year-on-year, while the total value of contracts increased by more than 57% month-on-month and decreased by 48% year-on-year. The number of residential property transactions in Hong Kong in Q1 hit a three-quarter high, up 29% quarter-on-quarter, but still down 30% from Q1 2023. Since the "withdrawal" of the local property market at the end of February, the sentiment of first-hand transactions has picked up significantly, driving the overall number of transactions to rebound, but developers are actively selling the stock and newly launched first-hand residential units at preferential prices, and it is expected that the prices of local residential properties will remain low in the short term.
In terms of policy, a number of fintech innovation measures have been gradually implemented. On 12 March, the Hong Kong Monetary Authority (HKMA) announced the launch of a "sandbox" mechanism for stablecoin issuers to support the development of Hong Kong's virtual asset ecosystem. On 14 March, the Hong Kong Monetary Authority (HKMA) announced the launch of the second phase of the e-HKD Pilot Scheme to further explore the innovative application scenarios of e-HKD in Hong Kong. The new investment immigration program was officially launched. The New Capital Investment Entrant Scheme (NEENTS) has been accepting applications since 1 March, allowing eligible persons to obtain the opportunity to relocate to Hong Kong by investing HK$30 million or more in financial assets, and has received more than 1,000 enquiries as of the end of March.
1. Bond market
1.1 Chinese dollar bonds
1.1.1 Primary Market
In March, the restructuring of real estate bonds led to the overall issuance of Chinese-funded US dollar bonds, and the issuance of financial and urban investment decreased year-on-year. During the month, the total issuance of Chinese dollar bonds amounted to about US$15 billion, an increase of 104.8% year-on-year and 739.8% month-on-month, respectively. In terms of industries, the issuance scale of real estate bonds during the month was US$10.99 billion, mainly due to the debt restructuring issuance of Aoyuan and Zhongliang Group, and the issuance of real estate bonds in the previous month and March 2023 was zero, the issuance of financial bonds was about US$2.52 billion, a year-on-year and month-on-month change of -53.7% and +182.3% respectively, and the issuance of urban investment dollar bonds decreased by 1.8% year-on-year to US$710 million. In the next three months, the overall maturity pressure of Chinese dollar bonds will increase. In March, the maturity and repayment scale of Chinese dollar bonds was US$16.27 billion, an increase of 33.1% year-on-year and 95.3% month-on-month, respectively, of which the maturity scale of real estate dollar bonds was US$5.1 billion, the highest since January 2023, and the outstanding scale as of the end of the month was about US$3.1 billion. About US$57.33 billion of bonds are expected to mature in the next three months (excluding early repayment), of which real estate dollar bonds will face maturity pressure of US$6.59 billion in June 2024, the highest since June 2021, and urban investment bonds will mature at about US$3.71 billion, the highest since November 2022.
1.1.2 Secondary Market
The Chinese dollar bond market continued to rebound, narrowing its gains at the end of March due to rising US Treasury yields and credit events. The Standing Committee of the People's Republic of China pointed out that "systematic planning of relevant support policies to effectively stimulate potential demand", and the government work report proposed to accelerate the construction of a new model of real estate development and optimize the regulation and control of the real estate market according to the city's policies. Related tailwinds supported the continued rebound of Chinese dollar bonds, especially high-yield real estate bonds. However, since March, the negative news of Vanke's credit has gradually fermented, causing the prices of related stocks and bonds to continue to fluctuate. During the month, a 2.5-year, US$300 million bond of Jinhui Real Estate defaulted technically, and the credit ratings of real estate companies such as Longfor and Agile were downgraded.
As the latest U.S. non-farm payrolls data unexpectedly increased sharply, inflation data is still sticky, the Fed released a hawkish statement under the market's expectations for the Fed's first interest rate cut are further delayed, and the number of interest rate cuts is expected to be reduced from 3 to 2 times this year, U.S. Treasury yields and the U.S. dollar remain strong, and Chinese U.S. dollar bonds narrowed their rise at the end of the month under the influence of related factors. During the month, the Markit iBoxx China USD Bond Overall Return Index closed up about 0.7%, and the high-yield index outperformed the investment-grade index for five consecutive months. Since April, the yield of US bonds has further risen by 4.5%, dampening the price performance of investment-grade Chinese US dollar bonds, and it is still necessary to pay attention to the combined impact of the US economic resilience and the supply-side shock of US bonds.
1.2 Offshore RMB bonds
The deepening of the inversion of the interest rate differential between China and the United States has further highlighted the cost advantage of offshore RMB financing, and the issuance of offshore RMB bonds[1] corporate bonds hit a record high in March, and the issuance of urban investment entities continued to expand. According to Bloomberg data, a total of 146 offshore RMB bonds (excluding certificates of deposit) were issued during the month, an increase of 80.3% month-on-month and 55.3% year-on-year, respectively, and a total financing scale of 84.05 billion yuan (RMB, the same below), an increase of 21% month-on-month and 96.5% year-on-year, respectively. Among them, the issuance scale of corporate bonds reached 43.85 billion yuan, a new high since data became available in 2007, and the issuance scale of corporate bonds in the first quarter of 2024 totaled 94.98 billion yuan, also setting a new high in the quarterly issuance scale.
In terms of government bonds, in March, the Ministry of Finance issued the first offshore RMB sovereign bonds of this year in Hong Kong, totaling 12 billion yuan. During the month, the People's Bank of China (PBoC) tendered for the issuance of the third tranche of offshore RMB central bills in 2024 in Hong Kong, with a term of 6 months (182 days) and an issuance scale of RMB25 billion. In terms of corporate bonds, the issuance scale of financial bonds in March reached 23.66 billion yuan, accounting for 31%, a total of 21 urban investment entities issued offshore RMB bonds, an increase of 13 from the previous month, and the financing scale totaled 10.86 billion yuan, an increase of 1.76 times from the previous month, and the average maturity of urban investment entities was 2.7 years and the weighted average coupon was 4.74% (the average maturity of urban investment entities issued in February 2024 was 2.7 years and the average coupon was 4.87%).
As of the end of March, the total circulating scale of offshore RMB bonds totaled 1,141.39 billion yuan. In the short term, U.S. bond yields remain volatile, and the market expects that the People's Bank of China still has room to cut interest rates, and it is expected that the issuance of dim sum bonds will continue to be attractive to issuers at low cost.
1.3 Operation of Bond Connect
In February, the trading volume of Northbound Trading under Bond Connect fell seasonally, and the scale of bond custody by foreign institutions in the mainland's interbank market increased for six consecutive months. In February 2024, the cash bond trading volume of foreign institutions in the mainland's interbank bond market reached RMB1.27 trillion (RMB, the same below), with an average daily trading volume of about RMB70.5 billion, a decrease of 31.7% and 16.7% month-on-month, respectively, and an increase of 25.7% and 39.6% year-on-year, respectively. In February, the trading volume of Bond Connect Northbound Trading was 677.5 billion yuan, down 36.7% from the peak in January, and the average daily trading volume was 37.6 billion yuan, down 22.8% from the previous month. In terms of bond types, the proportion of government and financial bonds in February increased by 2 percentage points month-on-month to 17%. As of the end of February 2024, the custody balance of foreign institutions in the mainland's interbank bond market was RMB3.95 trillion, a new high since March 2022, accounting for 2.8% of the total custody volume of the interbank bond market. The custody volume of bonds under the Northbound Bond Connect was 754.58 billion yuan, accounting for 19.1% of the total custody volume of foreign institutions in the interbank bond market.
As of the end of February 2024, a total of 1,128 foreign institutional entities (-1 from the previous month, the same below) have entered the interbank bond market, of which 556 (+1) have entered the market through direct investment channels, 823 (-1) have entered the market through the "Bond Connect" channel, and 251 (+1) have entered the market through both channels.
The custody balance of the Southbound Bond Connect hit a seven-month high. According to the data of the Shanghai Clearing Exchange, as of the end of February 2024, the number of "Southbound Connect" bonds under custody through the Stock Connect model was 734, an increase of 30 from the previous month, and the custody balance was 398.27 billion yuan, an increase of 2.6% from the previous month, the highest since July 2023, accounting for 1.1% of the total balance of bonds under custody of the Shanghai Clearing Exchange.
Second, the stock market
2.1 Review of Hong Kong stock performance
2.1.1 Primary Market
The primary market issuance activity of Hong Kong stocks remained weak in March. During the month, a total of 7 small new listings were listed, with a total net proceeds of HK$1,992 million, a decrease of 12.5% and 5.7% year-on-year respectively. In March, the newly listed companies covered materials, software, consumer services, etc., among which the largest fundraising was potash fertilizer company Michael Group, with a net fundraising of about HK$860 million. In addition, during the month, Alibaba announced that it had withdrawn its Hong Kong IPO application from its subsidiary Cainiao Smart Logistics Network Co., Ltd. and made an offer to Cainiao's minority shareholders to sell all of its issued Cainiao shares to Alibaba Group at a price of US$0.62 per share, for a total consideration of up to US$3.75 billion. In the first quarter of 2024, a total of 12 Hong Kong IPOs were listed, with a total net proceeds of HK$3.74 billion, with the number and scale of issuance falling by 33.3% and 22.6% year-on-year respectively, the lowest since the same period in 2009. According to Deloitte, the Hong Kong Stock Exchange fell to the 10th largest fundraising in the world in the first quarter, followed by the New York Stock Exchange, the Nasdaq Exchange and the Swiss Stock Exchange.
From March to early April, a total of 34 companies have submitted listing applications to the Hong Kong Stock Exchange, including intra-city logistics trading platform Lala (Lala Technology Holdings Limited), cosmetics brand Mao Geping, and autonomous driving unicorn Horizon. As of the end of March, there were about 91 listing applications on the main board and GEM sectors processed by the Hong Kong Stock Exchange, and the reserve of new shares was still sufficient. In the future, the volatility of the secondary market of Hong Kong stocks has risen since late January, and the overall valuation of individual stocks has been restored, which is expected to continue to boost the recovery of IPO activities.
2.1.2 Secondary Market
In March, Hong Kong stocks as a whole continued to fluctuate, and the trading activity increased significantly. In the first half of March, Hong Kong stocks showed a valuation repair market, and the Hang Seng Index once touched 17,000 points, but in the second half of the month, with the latest ISM manufacturing PMI and non-farm payrolls data in the United States stronger than expected, superimposed on the impact of the hawkish statement of Federal Reserve officials, the Hang Seng Index fluctuated and fell; At the end of March, the Hang Seng Index closed at 16,541.42 points, up 0.18% in the month, and the Hang Seng Technology Index rose 1.35%, significantly narrower than the increase in February. During the month, the average daily turnover of the main board of Hong Kong stocks rebounded significantly by 23.6% month-on-month to HK$111.16 billion, the highest since March 2023.
2.2 Investor Sentiment
In March, the southbound funds of the Shanghai-Shenzhen-Hong Kong Stock Connect strengthened the low-level deployment, and the northbound net inflow decreased month-on-month. During the month, the cumulative net inflow of southbound funds in Hong Kong Stock Connect was HK$85.95 billion, an increase of 2.5 times month-on-month. The net inflow of northbound funds for the Stock Connect decreased by 63.8% QOQ to RMB21.99 billion. The valuation of Hong Kong stocks is still at a low level, and the premium of AH shares has fallen slightly. At the end of March, the rolling price-to-earnings ratio of the Hang Seng Index (P/E TTM) closed at 8.43, at the 10-year historical 9.9% percentile, and with the valuation of Hong Kong stocks repairing slightly, the Hong Kong Stock Connect AH share premium index fell back below 150 in mid-March, and then rose again, still at the 10-year historical 98.7% percentile at the end of the month. In addition, the sentiment of Hong Kong stocks has been significantly boosted since the beginning of the year after the intensive introduction of favorable policies in the mainland, and the policy direction of the two sessions report is mainly stable, focusing on high-quality development rather than focusing on strong stimulus, and the market sentiment has stabilized since March.
In the future, the resilience of the U.S. economy and the uncertainty of the Fed's interest rate cut pace still hinder the recovery of Hong Kong stocks' capital momentum, and the overall market of Hong Kong stocks is still driven by the mainland's fundamentals and corporate earnings. Combined with valuation indicators, the bottom allocation of Hong Kong stocks in the medium and long term is still cost-effective.
3. Foreign exchange
3.1 Hong Kong Dollar Market
3.1.1 Hong Kong Dollar Interest Rate
Under the influence of seasonal factors, Hong Kong dollar liquidity has generally tightened. As of the end of March, the overnight, 1-month and 3-month HKD Hibor closed at 5.00%, 4.80% and 4.72% respectively, up 3.3bp, +31.6bp and 3.3bp respectively from the end of the previous month. Towards the end of the quarter, the Hong Kong Monetary Authority (HKMA) released HK$1.068 billion through the discount window to inject Hong Kong dollar liquidity into the banking system several times during the month, with a total of HK$6.505 billion of overnight funds withdrawn in March, the largest since December 2023, and a further HK$1.068 billion released through the discount window since April. The interest rate differential between the United States and Hong Kong narrowed in stages with the rise in Hong Kong dollar interest rates, and widened again in early April. As of the end of March, the 1-month Libor-Hibor spread was 64.2bp, narrowing 31bp from the end of the previous month. Since the beginning of April, as the impact of cross-seasonal factors has subsided and the Hong Kong dollar Hibor has fallen as a whole, the one-month US-Hong Kong interest rate spread has once again widened to about 100bp, hitting a new high since September 2023.
3.1.2 Hong Kong and Dollar Exchange Rate Trends
Funding demand supports the trend of the Hong Kong exchange rate, which has been slightly under pressure since the end of March. In March, the southbound funds of Hong Kong Stock Connect deployed Hong Kong stocks at a low level, and the quarter-end settlement demand of the banking industry all supported the trend of Hong Kong exchange rates, and USDHKD fluctuated around the pivot of 7.8231 in the month, and was reported at 7.8260 at the end of March, and the Hong Kong dollar weakened by 0.03% in the month. Since the end of March, strong U.S. fundamental data and the Federal Reserve's statement have further supported the expectation of "no rush to cut interest rates" this year, and the U.S. dollar index once broke through 105 in early April and recently fell back to around 104.1.
In the short term, the US dollar interest rate is expected to continue to fluctuate at a high level, and the current aggregate balance of the Hong Kong banking system is still at a low level, and the Hong Kong dollar interest rate is still likely to fall in stages, but it is unlikely that the US-Hong Kong interest rate differential will break through the high level in February 2023 again. At the same time, factors such as the low valuation of Hong Kong stocks attracting capital deployment and the recovery of local property market transactions in recent months are expected to support the demand for Hong Kong dollar funds and stabilize the trend of Hong Kong exchange rates.
3.2 Offshore RMB Market
3.2.1 Offshore RMB deposits
In February, Hong Kong's offshore RMB cash pool expanded month-on-month, and the scale of cross-border trade settlement fell slightly. As of the end of February, total RMB deposits in Hong Kong amounted to RMB964.2 billion, up about 1% month-on-month and 18.5% year-on-year. In February, the total remittance of RMB related to cross-border trade settlement was 1,064.4 billion yuan, down 24% month-on-month and up 42.4% year-on-year. After the peak of foreign exchange settlement on New Year's Eve, offshore RMB trading activity cooled marginally in February, with the clearing volume of Hong Kong's RMB RTGS system[2] reaching RMB51.7 trillion during the month, down 78.7% year-on-year and down 19.8% month-on-month.
3.2.2 Offshore RMB exchange rate
The RMB exchange rate continued to be under pressure in March, and the inversion of the onshore and offshore RMB exchange rate differential deepened. The overall strength of the US dollar index and market expectations that the People's Bank of China still has room to cut the reserve requirement ratio (RRR) during the month put the RMB exchange rate under pressure, but the optimistic economic data and dim sum bond issuance in the mainland still supported the demand for offshore RMB funds. USDCNH hit a four-month high of 7.28 in the second half of March and closed at 7.2546 at the end of the month. The CNH weakened by 0.68% during the month, widening its decline from 0.41% in the previous month (the CNH weakened by 0.46% month-on-month and fell 1.33% in the previous month), while USDCNH fell back to around 7.2430 in early April. The onshore-offshore exchange rate differential fluctuated slightly in March, ending at -334bp, a deepening of 159bp from the inversion at the end of February.
The main maturity RMB forward NDF continued to weaken slightly, and the decline narrowed. During the month, the 1-month, 3-month and 1-year USD/RMB non-deliverable forward (USDCNY NDF) exchange rates fluctuated around the pivot of 7.1183, 7.1119 and 7.0208 respectively, and the implied RMB exchange rate weakened by 0.09%, 0.16% and 0.19% respectively compared with the pivot level in February.
In the derivatives market, the USD/RMB swap point continued to decline with the widening of the interest rate differential between China and the United States, and rebounded at the end of the month. The inversion of the interest rate differential between China and the United States continued to widen during the month, and the USD/CNH swap points continued to decline compared with the previous month. During the month, the 1-year USDCNY swap fluctuated around the pivot of -2652pips, down about 93.73pips from the February pivot, and the 1-year USDCNH swap fluctuated around the pivot of -1764pips, down about 46.7pips from the previous month's pivot. As offshore RMB liquidity tightened at the end of the month, the USDCNH swap closed at -1607pips at the end of March, up 185.5pips from the end of February.
The increase in USD/CNH futures trading volume and options trading on the Hong Kong Stock Exchange reflect market expectations that CNH will continue to be under pressure. In March, the trading volume of standard USD/CNH futures contracts on the HKEX WAS ABOUT 1.65 MILLION, UP 24.4% MONTH-ON-MONTH (-19.4% M/M IN FEBRUARY), AND THE OPEN INTEREST AT THE END OF THE MONTH WAS 36,600 CONTRACTS, DOWN ABOUT 1% Q/M (+0.7% MoM in February). During the month, the trading volume of USD/CNH options contracts on the Hong Kong Stock Exchange increased by 2.3 times month-on-month to 154, and the open interest at the end of the month was 302, a decrease of 2.3% month-on-month, of which the open interest of call options increased by 10.6% month-on-month, and the open interest of put options decreased by 33% month-on-month, reflecting the expectation that the offshore RMB will continue to be under pressure in the short term.
3.2.3 Offshore RMB interest rates
Since the end of March, offshore RMB liquidity has tightened significantly. During the month, the 1-week, 1-month and 1-year CNH Hibor fluctuated around the pivot of 3.16%, 3.24% and 3.10% respectively, down 10.4bp, 11.6bp and 1.2bp respectively from the previous month, but at the end of the month, due to seasonal factors, the short-end overnight CNH Hibor rose to a nearly two-year high of 5.98%, and the HKMA's RMB20 billion intraday repo liquidity was used by 16.4 billion yuan on March 28. In March, the People's Bank of China (PBoC) reduced the scale of reverse repo funds, and the onshore short-term 1-week, 1-month and 1-year Shibor rose slightly, the overall liquidity was abundant, and the onshore RMB interest rate spread widened as a whole. The 1-week, 1-month and 1-year CNH Hibor-Shibor closed at 265bp, 178.9bp and 99.3bp at the end of the month, respectively, with cumulative changes of about 141.5bp, 57.8bp and 21.3bp, respectively. At the end of the month, affected by the sharp rise in short-term CNH Hibor, the inversion of CNH Hibor-HKD Hibor further narrowed, and the overnight spread turned positive at the end of the month.
Annotation:
[1] In addition to the narrow dim sum bonds issued in Hong Kong, China, the broad offshore RMB bonds excluding interbank certificates of deposit also include offshore RMB bonds issued or listed in Taiwan, Singapore, Luxembourg and Macao, China, as well as offshore RMB bonds issued in the Mainland Free Trade Zone ("Pearl Bonds").
[2] The RMB RTGS system (also known as the RMB Clearing House Autopay System, CHATS System) is the clearing bank of Bank of China (Hong Kong), which has a settlement account with the People's Bank of China and is a member of China's national modern payment system.
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