In the current macroeconomic environment, Chinese bonds remain largely underappreciated. As the onshore Chinese bond market remains somewhat restricted, offshore renminbi bonds are easily accessible to foreign investors. Also known as dim sum bonds, they offer attractive relative yields on mostly government and agency debt, while enabling investors to get exposure to China and the renminbi.
Brief introduction to dim sum bonds
Dim sum bonds, as mentioned above, are bonds denominated in renminbi but issued offshore. The primary hub for dim sum issuance is Hong Kong, with London, Singapore and Luxembourg among other locations.
Government policies to promote the use of the renminbi outside of China and liberalisation of fund flows between onshore and offshore Chinese markets are the main factors driving growth in the offshore renminbi bond market over the last decade. The first dim sum bond was issued by the China Development Bank in 2007, followed by a ground-breaking issuance of RMB 6 billion in Treasury bonds by China’s Ministry of Finance in 2009. The continuous supply of treasury bonds helped establish the benchmark yield curve and facilitate pricing of dim sum bonds in Hong Kong.
Chinese and Hong Kong companies tend to represent a large share of dim sum bond issuance. However, between 2011 and 2013, international businesses consistently made up between 20 and 30 per cent of gross issuance. A similar situation occurred in 2017 when Chinese regulatory scrutiny on offshore borrowing by mainland companies led to multinationals issuing close to 70% of all dim sum bonds.
After reaching a peak of RMB 587 billion in 2014, gross issuance of dim sum bonds declined for several years before stabilising in early 2018. The fall can be attributed to slowing economic growth in China and increased renminbi volatility. While recent issuance data is not widely available, the second quarter of 2019 saw significant issuance activity, with the People’s Bank of China selling RMB 50 billion of bills. Covid-19 has, no doubt, triggered an increase in market activity as well as the rise in delinquencies. According to data from Bloomberg, there was $8.1 billion of missed repayment obligations in the offshore market, 2.1 times the total in 2019.
Purpose of dim sum bonds
The dim sum market is primarily utilised by international companies looking to raise offshore renminbi funds to support their businesses in the onshore market and by mainland China firms as a fundraising vehicle for outward direct investment (ODI). Over the years, multinationals like McDonald’s, BP, Caterpillar and Unilever issued dim sum bonds to fund their operations in China. For Chinese companies, offshore funding is often used to finance outward M&A as well as to diversify sources of capital, especially when liquidity conditions in the onshore market are less favourable.
Overall, several factors affect market activity in dim sum bonds. At the firm level, issuance is impacted by interest rate differentials between onshore and offshore funding, renminbi exchange rate and overall funding costs. At the macro level, policy changes, as well as economic and currency prospects, might affect companies’ funding decisions.
Dim sum market profile
Looking at the issuer profile of the dim sum market, absence of any notable restrictions leads to a reasonably diverse market. Leading players are multinationals, mainland Chinese firms, as well as Hong Kong companies. The issuer profile fluctuates based on funding and economic dynamics, as well as policy changes in China. For example, the government’s crackdown on offshore financing in 2017 led to an overall drop in issuance and withdrawal of Chinese companies from the market.
The industry profile is equally diverse. Financials and real estate developers represent nearly 50% of the market. However, Chinese firms often use special purpose vehicles to raise offshore funds which contributes to the relatively large share of financials. Dim sum bonds tend to fund investment projects or working capital. As such, their maturity is generally between one and three years. Both retail and institutional investors are active in the space, given high yields relative to renminbi deposit rates in Hong Kong.
Should you consider dim sum bonds for your portfolio?
Chinese bonds offer dual exposure to the Chinese economy and its currency. Renminbi is set to benefit from capital inflows and its ascending position among the world’s reserve currencies. At the same time, the Chinese economy is on path to be the only major economy to record positive GDP growth this year. Low correlation with traditional assets offers further diversification benefits, making dim sum bonds an enticing asset class to considering.