HONG KONG - Bank of China Ltd (BOC) is overtaking HSBC Holdings PLC to become the top underwriter of yuan bonds in Hong Kong this month after Vice Premier Li Keqiang allowed domestic companies to tap the city's lower borrowing costs.

The Beijing-based lender managed three so-called dim sum bond sales valued at 2.7 billion yuan ($424 million) in October, for a 31 percent share of all issuance, beating HSBC, the biggest underwriter in the year, with a 14 percent stake, data compiled by Bloomberg show.

BOC's deals include issues for the Hong Kong units of China National Petroleum Corp, China's biggest oil company, and Sinotrans Shipping Inc, the third-largest shipper.

Global investors, who have limited access to bonds in the rest of China, will soon be offered the first dim sum debt from local companies as the nation seeks to bolster Hong Kong's status as a financial hub.

Baosteel Group Corp, China's second-largest steelmaker, won cabinet approval on Oct 20 to raise 6.5 billion yuan.

"The main lenders to Chinese companies will most likely become the underwriters of their dim sum bonds," said Shi Lei, the head of fixed-income research in Beijing at Ping An Securities Co, a unit of the country's second-biggest insurer.

"The dim sum bond market is marked by strong demand and it's a seller's market.

"Institutions that previously won deals for their familiarity with local investors will be less advantaged than those who can bring in new issuers."

Dim sum issuance jumped to 131 billion yuan this year from 35.7 billion yuan in 2010, data compiled by Bloomberg show. HSBC managed 21.6 percent of the sales, including issues by UK-based retailer Tesco PLC and Germany's Volkswagen AG.

Standard Chartered PLC was second with a 12 percent share. Deutsche Bank AG had 9 percent, followed by Royal Bank of Scotland Group PLC with 7.7 percent.

"We are still the top underwriter of dim sum bonds this year," said Gareth Hewett, a spokesman for HSBC in Hong Kong, adding that the bank is committed to developing the market and promoting use of yuan for international trade and finance.

BOC, the top underwriter last year, ranks fifth this year, arranging 6.7 percent of dim sum sales.

Industrial and Commercial Bank of China Ltd and Agricultural Bank of China Ltd are also in the top 10.

"Chinese banks and companies are keen to tap the dim sum bond market as credit is tight at home," said Nathan Chow, an economist at DBS Bank (Hong Kong) Ltd, the local unit of Singapore's biggest lender.

"They are lining up to sell, and that might drive yields up, but the costs are still significantly lower than onshore." Li pledged in August that mainland banks and non-financial companies would be allowed to sell up to 50 billion yuan of bonds in Hong Kong this year.

The previous system of selling through offshore vehicles limited investors' recourse to the parent company's assets in the event of a default, said Kyungwon Lee, partner for Asian capital markets at Shearman and Sterling in Hong Kong, which provided legal advice on China National Petroleum's sale. Issue sizes will be larger with Chinese companies directly selling the debt, DBS's Chow said.

"Chinese banks enjoy some natural advantages as they have strong lending relationships with companies in China," said William Liu, Hong Kong-based partner at law firm Linklaters LLP. "These banks, with much wider branch networks in China than foreign rivals, are also closer to local branches of government departments."

The average dim sum bond yield has risen 55 basis points this month, up 178 basis points from a record low of 1.91 percent in February, according to an index compiled by HSBC, as expectations the yuan will appreciate abated.

India's top-rated three-year rupee-denominated corporate bonds yielded 9.6 percent on Tuesday.

Bloomberg News