TAIWAN'S financial companies, seeking higher returns on more than US$1.5 trillion in assets, plan to buy more Dim Sum bonds after regulators allowed direct sales by local companies.

Manulife Asset Management (Taiwan) Co, HSBC Global Asset Management (Taiwan) Ltd and SinoPac Securities Corp, all based in Taipei, said they prefer investing in businesses incorporated locally that have debt ratings. Five unrated overseas units of the island's companies sold 2.6 billion yuan (US$408 million) of yuan-denominated bonds in Hong Kong in the past three years in six offerings, less than the 27 by South Korean corporations and 13 from Singapore, Bloomberg data show.

The Financial Supervisory Commission lifted the issuance ban last week and the island's bank authority is in talks to allow yuan settlement of foreign trade, as Taiwan leader Ma Ying-jeou abandons his predecessor's pro-independence stance in favor of closer economic ties with the Chinese mainland. The yield premium for sovereign Dim Sum bonds over Taiwan's government debt has doubled to a record in the past 11 weeks as expectations for yuan appreciation fade.

"Investors are very much interested in this debt as they have more knowledge of the balance sheets of the parent companies, and they will provide much better returns than local issuance," said Penny Chen, who helps oversee US$140 million as a fund manager at Manulife in Taipei. "Taiwanese firms have constant need for yuan."

Taiwan has the largest trade surplus globally with the Chines mainland, supplying machinery and components to the world's biggest exporter. Foreign direct investment by Taiwanese companies, including Hon Hai Precision Industry Co and Uni-President Enterprises Corp, jumped 11 percent to US$13 billion in 2011.

Issuers ready

Chailease Finance BVI Co, a unit of the island's biggest commercial finance company, plans to return to the market. It raised 750 million yuan through a sale of three-year Dim Sum securities at 5 percent in March, according to data compiled by Bloomberg. That compares with the 1.75 percent coupon it paid to sell 4 billion New Taiwan dollar (US$133.4 million) notes of the same maturity in August.

The fundraising was still attractive as it paid at least 100 basis points less selling the debt than getting a loan onshore, even after the central bank's two interest-rate cuts in the past two months, Chief Strategy Officer Kevin Liao said in Taipei.

"As our China business is expanding really fast, we need yuan-denominated funding to directly support our financing," Liao said. "Selling Dim Sum has been cheaper than getting a loan onshore, and we'll want to do it again when market conditions improve and China's economy stabilizes."

Including corporate debt, average yields on Dim Sum bonds climbed 116 basis points, or 1.16 percentage point, to 5.39 percent in the past year, the BOCHK Offshore RMB Bond Index shows.

China's benchmark one-year lending rate is 6 percent, after cuts in June and July.

"We'd like to see the big names come to market," such as Taiwan Semiconductor Manufacturing Co, the world's biggest contract chip manufacturer, and China Steel Corp, the island's biggest steelmaker, said Frank Huang, head of trading for fixed income at SinoPac Securities Asia Ltd in Hong Kong. "We're definitely interested in these Dim Sum bonds. We know these companies, and we've been doing businesses with them."

Increasing allure

The average yield on sovereign Dim Sum debt in a Bank of China Ltd index climbed to 2.63 percent yesterday, 171 basis points more than the 0.92 percent yield on five-year Taiwanese government debt.

Yields on Chinese government securities maturing in 2017 fell one basis point in Shanghai on Friday to 2.68 percent. South Korea's similar-maturity notes yield 3.07 percent and Japan's yield 0.18 percent.

Dim Sum yields rose as the yuan headed for the biggest weekly decline in a month as the economy expanded by the least in three years. The currency weakened 0.07 percent on Friday to 6.3776 per US dollar as of 10:31am in Shanghai, extending last week's drop to 0.21 percent, according to the China Foreign Exchange Trade System. Gross domestic product increased 7.6 percent in the second quarter from a year earlier, official data showed. That compares with the 7.7 percent median estimate of 38 economists in a Bloomberg News survey and 8.1 percent in the previous quarter.

While the yuan's 1 percent decline in the past three months has eroded Dim Sum returns, its relative stability still attracts investors, according to Steven Huang, a Taipei-based fund manager at HSBC Global.

India's rupee slumped 7.4 percent, Indonesia's rupiah sank 3.2 percent and Taiwan's dollar weakened 1.6 percent in that period.

"Although the yuan's appreciation has slowed, investors' interests in offshore yuan bonds have been steadily increasing," said Huang, who oversees NT$2.7 billion of Dim Sum assets. "Taiwanese people will have more faith in the debt if it's issued by companies they're familiar with."

Credit-default swaps protecting China's government debt against non-payment for five years rose two basis points to 114 yesterday, according to data provider CMA. The swaps pay the buyer face value in exchange for the underlying securities should a borrower fail to honor its debt obligation.

Taiwan has US$1.1 trillion cash and savings in the banking system, and mutual funds manage more than US$60 billion, according to Bloomberg data.

Life insurers had US$405 billion of assets as of 2010, according to the island's life insurance association.

Taiwan's bond yields more than halved in the past decade to the third lowest in the world as an aging population sought safer assets than equities to prepare for retirement.

Cathay Life Insurance Co, Taiwan's largest, and Taiwan Life Insurance Co said this year they're looking abroad for higher-yielding debt. BSH Bosch und Siemens Hausgeraete GmbH, the German appliance maker, briefed Taiwanese investors when selling US$1.5 billion in Dim Sum bonds this week, Treasurer Kai Schrickel said.

Two-way trade between the Chinese mainland and Taiwan rose 10 percent to US$160 billion last year, according to Chinese customs. Taiwan's trade surplus was US$78.7 billion with the mainland in 2011.

The island's bank authority is in final talks with the People's Bank of China to sign a deal that would allow transactions to be settled in the yuan, Governor Perng Fai-nan said in June.

"Taiwan's massive trade surplus with China makes it a good yuan-center candidate," Jin Zhongxia, director-general of the financial research institute at China's central bank said in a forum in Taipei on June 29. "Pushing the use of yuan will help boost trade between the mainland and Taiwan."