Offshore dim sum bonds gain popularity outside China on higher yields, yuan potential

The Chinese government used to issue sovereign debt exclusively in China, but since 2010 offshore yuan bonds have become a debt instrument increasingly pursued by institutional and retail investors in Hong Kong. 

Within just three years, the so-called dim sum bond market has soared almost 10 times to 500 billion yuan (more than Bt2.5 trillion).

So what are the major differences between onshore and offshore yuan bonds? China’s onshore bond market is open only to domestic investors and a limited number of qualified foreign institutional investors (QFII). Hong Kong investors wishing to trade onshore bonds can do so only through local asset managers subject to the approved QFII and yuan QFII quotas. 

The offshore bond market is accessible to all overseas investors with considerably fewer restrictions. Offshore bonds also offer more diverse choices for investors, including not just sovereign debt issued by the central government but also bonds from major global corporations and financial institutions operating in various countries and territories, including mainland China. 

Offshore yuan bonds, better known as “dim sum” bonds, are available to the general public, with each issue invariably generating an overwhelming response. In 2010, the total issuance of dim sum bonds was less than 50 billion yuan, rising within just two years to 275 billion yuan. Dim sum bonds issued this year are expected to reach between 280 billion and 360 billion yuan. 

 

Performance less affected by externalities 

Troubled by suggestions that the US Federal Reserve would taper off its quantitative-easing programme, the global investment market has experienced significant volatility, driving down some emerging bond markets by about 10 per cent year-to-date. However, dim sum bonds have continued to hold up, rising 3.4 per cent in the same period, reflecting this investment’s relative immunity from the impact of external factors. 

The higher yields, currently at 4.3 per cent, offered by dim sum bonds have also drawn further flows of capital into this market. 

Another factor for the positive performance of dim sum bonds is the expectation of continued appreciation of the yuan. The prospects of dim sum bonds are boosted by the tremendous upside potential of the yuan in the medium term, given the continued internationalisation of the currency, the Chinese government’s strong push for international use of the yuan and the significant undervaluation of the “redback” against other currencies.

 

Standards may differ between credit ratings in domestic and overseas markets 

Credit ratings provide a frame of reference for many dim sum investors. However, it is important to bear in mind that as yuan bonds are issued in onshore and offshore markets, credit-rating standards may not be consistent, and the same ratings will most likely not reflect the same levels of credit quality. 

Anyone interested in yuan bond investment is advised to consult his bond investment specialist with good local knowledge and experience in the mainland China market to help him explore hidden opportunities. 

 

Bonnie Lam is Head of Wholesale Business, HSBC Global Asset Management Limited, Asia Pacific.