China's surprise devaluation caused shock waves in global currency markets on Tuesday, with investors fearing it could put sustained pressure on offshore yuan and debt sold overseas by Chinese firms.
The renminbi in the offshore deliverable and non-deliverable market fell sharply while yuan-denominated, or "dim sum" bonds dropped across the board.
"We haven't sold any dim sum bonds after the move as the FX loss is already there and there's nothing we can do," said a bond fund manager in Hong Kong with such paper in his portfolio. "We are waiting to see how the yuan will move in the coming days to decide what we will do."
While hedge funds have been generally bearish on emerging market currencies in recent months, virtually none foresaw a China devaluation.
China devalued the yuan after a run of poor economic data, guiding the currency to its lowest point in almost three years in a move it billed as free-market reform.
The devaluation sparked a wave of stop-losses in the offshore market with the spread between the onshore and offshore yuan widening to its most in nearly a year.
In the derivatives markets, the non-deliverable currency curve flattened sharply as investors expected more volatility and higher short-term borrowing costs.
"Expectation that currency intervention could trigger liquidity tightness has pushed up rates in the front end," said Frances Cheung, head of Asian ex-Japan rates strategy at Societe Generale in Hong Kong.
In the dim sum market, benchmark bonds from giant computer maker Lenovo Group Ltd, due in 2020, fell half a point to 101/101.5 points in late morning trade.
Export Development Canada bonds due 2018 were down a quarter point at 99.75/100.25 and China Unicom 2017 was off by a similar margin at 99.40.
PROLIFIC ISSUERS
In recent years, Chinese companies have been prolific debt issuers overseas, attracted by cheap borrowing costs. Investors lined up to buy these bonds on prospects of relatively higher yields and a rising currency.
In 2014, Chinese firms sold nearly $100 billion in overseas markets, a record that was more than double the previous year's total, according to Thomson Reuters data.
Investors expect bond yields to move higher in coming months as players revise expectations for the Chinese currency.
SEB, a Scandinavian bank, revised its end-year yuan forecast to 6.40 per dollar from 6.20 earlier.
Investors are casting a wary eye on the billions of dollars global banks have accumulated in lending to Chinese parties, described as trade finance, if the Chinese currency weakens sharply.
Cross-border lending to Chinese counterparts grew to $963 billion at end-March 2015 from almost zero five years ago, according to the Bank of International Settlements.