Definition
Dim Sum Bonds are bonds issued outside of China but are denominated in Chinese Renminbi, instead of the local currency. They are named after the Chinese dish Dim Sum, presenting the idea of a basket of various bonds offered. Known for their higher yields, they allow foreign investors to access Chinese currency gains while mitigating the risk of Chinese foreign investment restrictions.
Key Takeaways
- Dim Sum Bonds are denominated in Chinese yuan (CNY) and issued in Hong Kong, which are available to international investors, thus providing an avenue for them to invest in Chinese currency-denominated assets without directly accessing China’s onshore market.
- The name “Dim Sum Bond” is derived from a Cantonese cuisine that is popular in Hong Kong, reflecting the bond’s location of issue. This bond market has grown significantly since its establishment in 2007, in response to China’s intention to internationalize the CNY.
- The performance of Dim Sum Bonds is closely related to the exchange rate of the Chinese yuan against other currencies. If the Chinese yuan appreciates against other currencies, the bonds’ value in the currency of the international investor will increase, providing potential capital gains on top of the interest rate return.
Importance
Dim Sum Bonds are important because they allow foreign investors a way to invest in Chinese yuan-denominated bonds, without having to directly access China’s restrictive domestic markets.
These bonds play a key role in supporting the internationalization of the yuan by promoting its use in global financial transactions.
With China being a significant global economic power, these bonds are vital for investors seeking to diversify their portfolio and gain exposure to the Chinese currency.
Moreover, Dim Sum bonds provide a potential higher yield compared to other fixed-income investments, hence it attracts investors seeking better returns.
Additionally, it also provides a fundraising platform for multinational corporations within the offshore Chinese market.
Explanation
Dim Sum Bonds serve the purpose of allowing investors to gain exposure to yuan-denominated assets, without the risk of foreign exchange controls that can be prevalent in mainland China. After China took steps to make RMB currency more international, creating these kinds of bonds became a method of attracting foreign investment for Chinese and non-Chinese issuers alike.
The bond issuance in RMB outside of China has surged drastically, thus enabling a wide range of investors to gain potential benefits from the Chinese growth story. Additionally, Dim Sum Bonds are used extensively as a means of diversifying the currency risk for an investor’s portfolio.
They offer a relatively high yield compared to other emerging market debt and present an appealing investment alternative for investors looking to mitigate risks associated with investing directly in yuan-denominated assets in mainland China. Furthermore, they are also used by corporations to finance operations or capital expenditures in China, as they provide a significant fundraising platform outside the mainland.
Examples of Dim Sum Bonds
**HSBC Dim Sum Bond Issue (2011)**: In 2011, HSBC issued the first-ever offshore Dim Sum Bond in London, which had a maturity period of two years. The issuing of this Dim Sum Bond encouraged other foreign banks to issue their own CNH bonds.
**McDonald’s Corporation Dim Sum Bond Issue (2010)**: In August 2010, McDonald’s Corporation was the first-ever non-financial corporation to issue a Dim Sum Bond, raising CN¥200 million. This move was seen to diversify the company’s sources of funding and to take advantage of the growing Chinese economy and Renminbi trade.
**Caterpillar Inc. Dim Sum Bond Issue (2012)**: Caterpillar Inc., a leading manufacturer of construction and mining equipment, issued a Dim Sum Bond in 2012 to raise financing for its operations. The issue provided the company with a new source of funding diversification and expanded its global investor base.
FAQs About Dim Sum Bonds
1. What Are Dim Sum Bonds?
Dim Sum Bonds are bonds issued outside of China but are denominated in Chinese Renminbi (RMB), rather than the local currency. These bonds emerged in 2007 as a result of Chinese policy aimed at expanding the international usage of its currency.
2. Who Issues Dim Sum Bonds?
Dim Sum Bonds are issued by financial institutions, corporations, and even governments. These are typically entities based outside of China. However, Chinese corporations and the Chinese government also issue Dim Sum Bonds.
3. What Are the Risks Involved in Investing in Dim Sum bonds?
The risks involved in investing in Dim Sum bonds include exchange rate risk, interest rate risk, and the credit risk of the issuer. It’s also important to know that the offshore RMB market is less regulated than the onshore RMB market, which can increase certain risks.
4. How Can I Invest in Dim Sum Bonds?
Investing in Dim Sum Bonds is usually done through a broker or an investment bank. There are also mutual funds and ETFs that focus on RMB-denominated assets including Dim Sum Bonds.
5. What Are the Benefits of Investing in Dim Sum Bonds?
There are several potential benefits to investing in Dim Sum Bonds. Firstly, they offer investors exposure to the Chinese currency and economy. Furthermore, Dim Sum Bonds generally offer a higher yield than similar maturity government and corporate bonds in other markets. However, it’s important to note that there are also risks involved.
Related Entrepreneurship Terms
- Yuan-denominated Bonds
- Offshore Bond Market
- Renminbi (RMB)
- Yield Curve
- Coupon Rate
Sources for More Information
- Investopedia: This website provides comprehensive financial information, definitions, and investment guides, including ones on Dim Sum Bonds.
- Bloomberg: Bloomberg is a global leader in business and financial market news. Its resources on Dim Sum Bonds are vast and insightful.
- Reuters: Reuters provides business, financial and international news to professionals globally. Their coverage includes detailed articles and updates on Dim Sum Bonds.
- Financial Times: FT offers global business news and analysis. Their coverage of Asian markets may include articles discussing Dim Sum bonds.
