Dim Sum Bond : Overview and its Prospect

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Dim sum bond, named after Cantonese brunch food, is a yuan denominated bond issued from Hong Kong financial market. In order to facilitate financial expansionary activities in Hong Kong, Chinese government opened its financial entry for foreign companies to issue yuan-denominated bonds early last year. Since it is to be issued in Hong Kong financial market and also it is necessary to differentiate itself from a bond issued from Mainland China (also known as ‘panda bond’), it is commonly called as ‘dim sum bond’. Particularly compared to panda bond, dim sum bond is not subject to limit the qualification of issuer and investor and it is considered as a useful financial instrument for an offshore investment.

Recently global investment bankers and affluent individual investors are interested in this yuan-denominated bond offering. Current statistics shows that transaction of Dim Sum bond expect to increase with a significantly high growth rate. In 2011, the transaction is forecasted to jump up to 108 billion yuan (169% YoY).

 

Since it is allowed to issue dim sum bond by foreign companies, numbers of foreign companies successfully have issued their yuan-denominated bond. McDonald’s had issued USD 30 million worth of dim sum bonds with three-year maturity on last September. The following month, ADB(Asian Development Bank) successfully sold its first dim sum bond about 180 million worth with ten-year maturity. Also Caterpillar, Illinois-based construction machinery titan, sold their first dim sum bond about USD 156 million last November. Among companies who either heavily exposed to Chinese economy or anxious to play in Mainland China, the demand for offering of dim sum bond is significantly high. Other global companies, such as United Rusal, the world largest aluminum producer and BP, global oil tycoon are scheduled to issue their dim sum bonds sooner or later.

Typical feature of dim sum bond are as follows: short maturity, solid credit rating, lower rate of return, lower liquidity. Based on HSBC’s study, approximately 90% of bonds are to be matured less than three years. Only 3% of bonds expect to last more than five years. In terms of credit rating, at least 92% of issuers are graded A and better which provide more confidence to investors. As of 2010, average rate of return of dim sum bond (three-year maturity) is about 0.95%, which is significantly lower than onshore interbank market rate, 3.28%. Due to its short maturity and solid credit rating, investors intend to keep until its maturity.

 

Besides of the fact described above, market consensus believe that Chinese yuan expect to appreciate up to 6~7% this year. Firstly, Chinese government express their sentiment that they consider increasing the interest rate in order to cool down the inflation scare and achieve the fundamental base for sustainable growth of economy. Actually Chinese implemented a series of the rate increase last year. As a result, Chinese yuan revalued up to 3.9% YoY. Secondly, initiated by United States and other countries are putting appreciation pressure on Chinese yuan to ease global trade imbalance.

 

However, it is not necessary to rule out any concern on dim sum bond investment. Even though the issuer is free from the qualification check now, formal approval from Chinese government is needed in case of transferring the fund by dim sum bond to mainland. Also if the interest rate does not go up as much as the market expected which eventually fail the appreciation of yuan, the rate of return will not turn out as much as investors expect to be.

 

Jin Mok Kim (jinmok.kim@gmail.com)

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