Most people think of dim sum as the Chinese tea time meal that
consists of dumplings and other snacks served by waiters pushing
steam carts around the dim sum parlor. But for global investors,
the term "dim sum" also refers to the offshore Renminbi (
) bond market. The currency in which these bonds are denominated is
also referred to as Chinese Offshore Yuan (
). This fast growing market was established in 2007, but didn't
take off until last year.
Under current rules, the dim sum market allows domestic and
foreign companies to issue bonds that are denominated in RMBs. The
rapid accumulation of RMB deposits in Hong Kong, is largely fueling
the fast growth of the dim sum market, as investors buy dim sum
bonds to earn a better return on their deposits. The dim sum market
experienced record issuance during the third quarter, with around
USD21.3 billion of new bonds. At present, the total size of the dim
sum market is around USD30 billion and growing.
Sources: Bloomberg, Hong Kong Monetary Authority
Although the Chinese government has issued some dim sum bonds,
the market largely comprises bonds issued by corporations from
China and abroad. As the chart below depicts, China-based issuers
dominate the market, but recently, foreign companies have also been
increasing their presence. Indeed, companies like Caterpillar
) and McDonald's Corp (NYSE:
) have even issued dim sum bonds.
Source: Hong Kong Monetary Authority
Dim sum bonds are mostly shorter-term in duration--between one
to three years--because the insurance industry is not a big
investor in the market yet. Insurers are the main driver of long
duration bonds since insurers typically invest in long-dated bonds
to better match their liabilities.
Instead, banks comprise roughly 70 percent of the investors in
the dim sum bond market. However, this is gradually changing now
that China has granted these investors limited access to its
domestic bond market. The Peoples Bank of China (PBoC) now allows
foreign central banks, RMB clearing banks and cross-border RMB
trade settlement participating banks to invest in its onshore
interbank bond market.
This allows these institutions to directly access the much
deeper USD4 trillion domestic Chinese bond market. As bank
participation in the dim sum market declines,
, individual investors, corporations and insurance companies from
all over the world should step in to fill the void.
Additionally, the dim sum market has the full sanction of the
Chinese leadership, including Li Keqiang, the vice premier of
China's State Council and the most likely successor to Premier Wen
Jiabao. In a recent speech, Mr. Li indicated that plans are being
formulated to facilitate onshore investment of RMB funds.
Presently, the RMB is not a fully convertible currency, so the dim
sum bond market provides greater ease in channeling funds back to
There are two ways in which companies move funds to the mainland
via the dim sum bond market: first as an inter-company loan to a
mainland subsidiary, and second as an equity capital injection into
a mainland subsidiary.
But this is still a slow process. For example, it recently took
around three months for McDonald's and Caterpillar to move their
RMB bond proceeds onshore.
Although this new market presents opportunities for investors,
risk must still be taken into consideration.
For instance, dim sum bonds behave very differently from onshore
RMB bonds. Besides having lower yields, their prices often move in
the opposite direction of domestic Chinese bonds.
Furthermore, CNH is an unregulated currency, so it fluctuates
more than the RMB, which is regulated by daily central parity
fixing within a narrow band. Finally, the offshore corporate bonds
for Chinese companies are all structurally subordinated to onshore
On the other hand, the eventual appreciation of the RMB will
reward investors, although the timing of this development is
for exposure to the dim sum market is
PowerShares Chinese Yuan Dim Sum Bond
(NYSE:DSUM ). This ETF tracks the Citigroup Dim Sum Bond Index,
which includes government as well as private bond issues.
The largest position in the fund is a Chinese government bond
maturing in 2016, with a coupon of 1.4 percent and an AA- rating
from Standard & Poors.
Other holdings include: a bond issued by China Development Bank
with a coupon of 2.7 percent, maturing at the end of 2013 and rated
AA-; a Bank of China bond with a coupon of 2.9 percent, maturing in
2013 and rated A-; and a Caterpillar bond with a coupon of 1.35
percent, maturing in 2013 and rated A.
The ETF was launched this past September. It's still quite small
at just $3.6 million in assets, but we expect it to quickly grow in
assets. The annual expense ratio is just 0.45 percent. And while
the ETF hasn't yet paid its first distribution, it should yield
between 3 percent and 4 percent.