Yuan Denominated “dim Sum” Bond Market Attractive Again

Hong Kong's uncared yuan denominated bonds or “dim sum” bonds are now attracting foreign investors due to improved sentiment towards yuan's future. As per data obtained from Thomson Reuters, total issuance of such bonds slid to three billion yuan (approximatly $435 million) during first quarter. This can be compared to 22.1 billion yuan during the identical period in 2016 and 69.9 billion in 2015. This drop is primarily due to investor concerns about holding the yuan denominated assets when the currency is expected to depreciate.

Dim sum values

According to Byan Collins of Fidelity International, investors have largely forgotten dim sum bonds. It means, he said, that there is value in such a market. All this becomes much more valuable when compared to the onshore Chinese bonds and the US dollar markets. The last two have went up a lot. It is no wonder that dim sum bonds make an excellent bond investment. The Chinese markets can be accessed through a number of programs like Renminbi Qualified Foreign Institutional Investor, Qualified Foreign Institutional Investor and new China Interbank scheme. As the offshore and domestic market become interlinked, it is anticipated that they will ultimately integrate into one yuan bond market over the course of time.

As per China bond data, supranational institutions and foreign central banks now hold approximately 15 percent of the onshore government bonds of China. General foreign investors now own approximately two percent.

Panda bond assurance

In February, yuan deposits in Hong Kong went down to 511 billion yuan from January's 522 billion yuan. This mirrors the lowest level from April 2011. The decision by China to start relaxing capital controls during the third week of April in the middle of a rapidly stabilizing yuan suggest that the offshore bond market for the yuan could be revived.

The decline in issuance of the offshore yuan bond in 2016 came in the middle of breakneck growth of the Panda bond issuance on mainland as both international and Chinese issuers have turned to domestic market. This is to lock in the cheap funding. These two markets have become much more interrelated as the Panda bonds became a possible option for the international issuers. The latter raised yuan funds in this manner, providing Chinese companies the needed flexibility to select among two markets.

Dim sum bonds, capable of bypassing tax implications and onshore regulations will continue to be in demand for both Hong Kong and US based investors. This will stay for a minimum of three years from 2017.

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