The offshore yuan market for Chinese debt in Hong Kong posted a record quarter in terms of volumes sold, as investors shrugged off the impact of a weak and volatile currency and mounting concerns over debt defaults in the world's second-largest economy.

A wave of refinancing due to maturing debt in the offshore market for Chinese debt denominated in yuan - known as the "dim sum" market - has failed to deter foreign investors who have lapped up these bonds thanks to their sizeable returns.

Dim sum debt sold in the quarter that ended in March amounted to 125 billion yuan ($20 billion), the highest quarterly level on record, according to Thomson Reuters data. That compared with 53 billion yuan for the December quarter.

The record quarter came despite growing worries over the outlook for the Chinese economy, as the yuan lost 2.5 percent against the dollar and amid investor jitters over mainland companies' ability to repay debt.

"The dim sum bond primary market is likely to continue flourishing in the second quarter as funding costs are lower in Hong Kong," said Raymond Gui, a senior portfolio manager at Income Partners who manages $350 million in debt. "Refinancing pressure is still heavy in the dim sum market."

While the yuan's drop reverberated in global currency markets, bond indexes tied to the performance of debt in the Chinese currency gained in that period in yuan terms thanks to rich interest payments compared with other bonds.

Those gains may accelerate further as markets expect the yuan to stabilize or even gain from current levels. A Reuters poll expects the yuan to rise to 6 against the dollar in 12 months compared with Monday's close of 6.2123.

Developer Greentown Real Estate, which sold a 2.5 billion yuan dim sum bond last May, said it likes offshore yuan bonds, given lower funding costs as investors lack investment channels and are therefore willing to accept lower yields.

Investors are also relieved about the drop in the yuan as it means the yield pickup on these bonds is enhanced in currency terms from a US dollar investor's perspective.

Money managers buying yuan debt can lock in a yield pickup of 80-160 basis points by swapping offshore yuan to the US dollar without taking any currency risk through currency derivatives markets, according to Becky Liu, a senior strategist at Standard Chartered Bank in Hong Kong.

Reuters