Renminbi asset appeal spurs dim sum bond mkt

Strengthened market infrastructure, enhanced secondary market liquidity and increased attractiveness of renminbi-denominated financial assets for global investors are improving the supply-demand dynamics of the offshore dim sum bond market.

Dim sum bonds are renminbi (yuan)-denominated bonds issued outside the Chinese mainland, mainly in Hong Kong. After a relatively quiet period, dim sum market activity has accelerated in recent years.

The offshore dim sum bond market is witnessing more diversified issuers, with the central government, mainland provincial and municipal governments such as Hainan, Guangdong and Shenzhen, and even the Development Bank of Kazakhstan, having issued dim sum bonds in Hong Kong.

Chinese mainland tech titans such as Tencent Holdings, Baidu and Alibaba Group are also raising a record amount of funds from Hong Kong's dim sum bond market as they seek cheap financing for business expansion.

In the first three quarters, the issuance amount had reached 574.03 billion yuan ($80.73 billion), reflecting a robust year-on-year growth of 12 percent, said mainland-based CSPI Ratings.

Last year, total dim sum bond issuances in Hong Kong soared 37 percent annually to exceed 1 trillion yuan. Yuan-denominated bonds so far account for more than 20 percent of the total bond issuance amount of the Hong Kong Special Administrative Region.

On the supply side, the low policy interest rates on the Chinese mainland, improved market infrastructure, enhanced secondary market liquidity and growing usage of the yuan in cross-border trade and investments support more frequent issuances of dim sum bonds.

Growing investor appetite for yuan assets is also bolstering demand for such bonds.

"As corporations accumulate more yuan, they need more yuan-denominated investment products to better manage their offshore renminbi holdings. By investing offshore yuan holdings in dim sum bonds — which is less risky than stocks — enterprises can earn more interest returns than traditional bank deposits," said Billy Mak Suichoi, associate professor at Hong Kong Baptist University's Department of Accountancy, Economics and Finance.

The Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong in September promulgated the Roadmap for the Development of the Fixed Income and Currency Markets (FIC Roadmap) which pledges to develop the city's bond and currency markets through boosting primary market issuances, enhancing secondary market liquidity, expanding offshore yuan business and building bond market infrastructure.

As an international financial center, Hong Kong does not have a strong bond market foundation, compared with other financial services segments such equities, foreign exchange, derivatives and wealth management, Mak said.

"When Hong Kong enlarges dim sum bond issuances, this will also spur more cross-currency trading between the renminbi, Hong Kong dollar and US dollar. This can enhance Hong Kong's foreign exchange market, putting the SAR in a position that can rival the top three global foreign exchange centers of Singapore, London and New York," the professor added. Currently, Hong Kong is the world's fourth-largest foreign exchange market.

Before unveiling the bold vision of the FIC Roadmap, the SAR's financial regulators have already ramped up various initiatives to boost the city's fixed-income market infrastructure.

"These initiatives will cement Hong Kong's role as a global renminbi hub, to play a central role in channeling onshore renminbi liquidity for their offshore usage, as well as enabling offshore borrowing of renminbi funds for onshore usage," said Becky Liu from Standard Chartered.

"These schemes will likely lead to an increase of outbound renminbi payments from onshore to offshore, and a rise of two-way renminbi capital flows, accelerating the internationalization of the renminbi," Liu said.