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By Saikat Chatterjee HONG KONG, May 16 (Reuters) - Despite recent volatility inthe offshore yuan market, the demand for bonds denominated inthe Chinese currency is likely to remain strong as the yuan'sappreciation trend looks intact. An HSBC index measuring total returns in the dim sum bondmarket has gained more than 1.5 percent this year. That beats returns in the Chinese onshore bond market by more than onepercentage point and is about even with how Hong Kong'sgenerally weak stock market has fared in 2013. Since the start of April, returns on dim sum bonds have beenboosted by the Chinese currency's solid performance in the faceof a resurgent U.S. dollar even as other Asian currencies haveremained broadly flat. The yuan has appreciated more than 1percent against the dollar since the end of March. Market participants expect further yuan gains for tworeasons. One, recent regulatory moves to clamp down on hot moneyflows being disguised as trade settlement have prompted analyststo believe that Beijing is laying the groundwork to widen theyuan's trading band soon, which may end up encouraging moreinflows into China from companies looking to hedge theircurrency exposure. Two, the People's Bank of China has kept the trajectory ofthe yuan's rise intact by fixing the daily midpoint strongerthan market forecasts amid recent weak data and some downgradesof growth forecasts for the Chinese economy. Prospects of more currency gains are encouraging investorsto snap up fresh issuances. Chinese developer Yanlord Land Group this week sold anoffshore renminbi bond amounting to 2 billion yuan at a yield of5.38 percent, below an initial price guidance of 5.5 percent. It received orders worth more than 7 billion yuan, extendinga streak of heavy demand for new issues, particularly high yielddebt in the offshore yuan bond market. That has encouraged overseas investors who are wary ofbuying dim sum bonds directly to purchase U.S.dollar-denominated bonds in Asia and the Middle East and swapthe exposure into the yuan via currency forwards. One such investor is Stratton Street Capital, a London-basedfixed income fund, which is highly bullish on the yuan. "The Chinese currency may not be as undervalued as earlierbut the fundamentals are strong and we expect it to gain 5-7percent this year," Andy Seaman, Stratton's portfolio managertold Reuters. While this forecast is "far more" than the consensus view of1-2 percent yuan appreciation, which he said "can be quite wrongwhen it comes to China." In two years, Stratton's assets under management have grownfrom less than $600 million to nearly $2 billion across itsfixed income products and managed accounts. Its renminbi bondassets have increased from $47 million to $326 million. "One of the reasons why we don't invest directly in the dimsum space directly is the lack of rated paper and we don't likehigh yield debt at this stage of the economic cycle and we findbetter opportunities in the investment-grade space elsewhere,"Seaman said. WEEK IN REVIEW: * Yunnan-based Highland Capital Management aims to raise 5billion yuan in the first round for a fund focused on investingin companies in Southeast Asia that serve Chinese tourists andwork in energy and natural resources. Yuan-denominated outbounddirect investment by Chinese companies in 2012 was theequivalent to $4.96 billion, compared with $77.2 billion intotal outbound foreign direct investment, according to centralbank data. * Three fund houses got approvals under the RMB QualifiedForeign Institutional Investor (RQFII) quotas totaling 5 billionyuan last week, suggesting that authorities are finally startingto dish out more quotas. Two billion yuan each was awarded toChina Asset Management and CSOP Asset Management while E Fundmanagement received a 1 billion yuan quota. * JP Morgan became the latest bank to execute a cross borderyuan transaction for a client after the company received across-border lending quota. China's central bank has startedallowing a small number of foreign companies to lend theirexcess yuan fund in the onshore market to fund their overseasoperations. * Regulators simplified rules governing foreign directinvestment to boost market reform after Premier Li Keqiangcalled on government agencies to cut red tape and cancelunnecessary administrative approvals. China attracted $29.9billion in foreign direct investment in the first three monthsof 2013, up 1.4 percent from a year earlier. CHART OF THE WEEK: Chart on banks FX purchases:Chinese financial institutions net purchased nearly 300billion yuan worth of foreign currency in April, up from March's236 billion yuan, suggesting that capital inflows were robustlast month. FX purchases were greater than the sum of the tradesurplus and FDI inflows in April, though they are is likely todrop in May due to the new regulations. RECENT STORIES:Weekly CNH Tracker:Chinese firm breaks ground with privately managed offshore yuanfund Bullish yuan herd leaves China fundamentals in thedust More stories about the CNH market Daily onshore yuan reports Daily China money market reports Offshore yuan rate Onshore yuan rate Offshore yuan dealt Onshore yuan on CFETS THOMSON REUTERS SPEED GUIDES