Global investors hunger for dim sum bonds

Despite a faltering renminbi, record high issuance and growing appetite around the world have reaffirmed the offshore yuan bond as a tempting investment.

BUOYANT ISSUANCE

"Dim sum" bond issues surged to 277 billion yuan (44 billion U.S. dollars) in the first six months of this year, close to the 280 billion yuan for the whole of 2013, according to researchers with Singapore's DBS Bank. More than 80 percent of issuers were from the Chinese mainland and Hong Kong.

The spread between onshore and offshore borrowing costs is likely to remain wide, and more companies are expected to borrow overseas in the second half.

On June 30, Huaxia Bank, a mid-sized Chinese commercial lender, issued a dim sum bond at an annual rate of 4.95 percent, much cheaper than domestic levels.

Refinancing may also drive new issues. According to Ivan Chung, senior vice president, Greater China Credit Research and Analysis at Moody's, as two-year and three-year bonds expire this year, issuers will have to refinance, perhaps with longer-term dim sum bonds, and the market will expect more diverse products.

UNFLINCHING ENTHUSIASM

Although renminbi depreciation spooked some currency traders, it did nothing to quell bond buyers enthusiasm to widen exposures to offshore yuan products.

A study by Fitch showed that offshore yuan bonds typically offered investors higher yields than comparatively rated U.S. dollar-denominated bonds. Furthermore, yuan bonds are not as vulnerable to further U.S. QE tapering as bonds of other emerging economies.

As the yuan fluctuates, the offshore yuan bond market keeps to normal fixed-income trading rather than becoming a tool to bet on the yuan.

"Pricing now more accurately reflects the credit risks," Chung said. "As more credit ratings make the market more transparent, fixed-income institutional investors, rather than currency speculators, are buying offshore yuan bonds."

"It forces people to be more thoughtful about what they are buying. They need to be more savvy, and can't simply expect currency appreciation to bail them out of a bad credit decision," said Jake Gearhart, Head of the Global Risk Syndicate, Asia at Deutsche Bank.

The falling yuan has done little to deter investors from buying dim sum bonds, mostly because they believe China's central bank has got the situation under control.

GLOBAL FOOTPRINTS

With renminbi clearing banks now in London and Frankfurt, European investors have been inspired to fatten up their yuan holdings.

While Hong Kong will remain the primary offshore yuan market, Europe is likely to be second, according to Deutsche Bank.

"Many institutions think that they are not complete without renminbi business," Chung said.

Lion City bonds and Goethe bonds, both offshore yuan bonds, have come out of Singapore and Frankfurt, respectively.

"From an access perspective, and for ease of investment, the dim sum market still stands out as one of the most attractive for an ability to buy corporate credit," Gearhart said.

The dim sum bond market is still not scalable enough for the bigger asset managers to allocate funds to it.

Total outstanding dim sum bonds stood at 55.5 billion U.S. dollars in 2013 by Fitch's estimates, only 3.7 percent of domestic yuan bonds with outstanding of 1.5 trillion dollars equivalent.

But with China likely to overtake the U.S. as the world's biggest corporate debt issuer, the market expects a spill-over to offshore borrowing.

"Whether you are bullish or bearish, you have to start focusing on it as the potential remains enormous," Gearhart said.