This time last year China’s nascent dim sum bond market was a roaring success story, but how has the market fared over the last 12 months?
Dim sum bonds are bonds denominated in the Chinese renminbi, or yuan, but issued outside of the Chinese mainland. They’re also known as CNH bonds—CNH is the symbol for renminbi traded outside of China.
The first dim sum bonds were sold in 2007 by Chinese financial institutions, but the market didn’t really take off until 2010, when the People’s Bank of China removed restrictions that had barred certain types of issuer from the market. Chinese corporates began issuing dim sum bonds, and in August 2010, McDonald’s became the first foreign corporate issuer, with a 200-million-renminbi bond.
Other foreign names followed, including a 350-million-renminbi issue by Yum! Brands, a 1-billion-renminbi issue by Caterpillar and a 1.5-billion-renminbi bond by Volkswagen. Throughout 2011, companies were attracted by the low funding costs associated with the market—Unilever sold three-year bonds with a 1.15% coupon—as well as the opportunity to access new sources of liquidity. Despite the low returns, investor demand was high, reflecting expectations that the renminbi was due to appreciate.
Issuance last year totaled 108 billion renminbi ($17.1 billion), up from 35.7 billion renminbi in 2010 and 16 billion in 2009.
Early this year, however, the pace of growth began to falter, as the Chinese currency took a beating.
“During the first half of the year, when the renminbi was depreciating against the U.S. [dollar], demand for dim sum bonds fell,” says Ashish Malhotra, head of Asia Pacific debt syndicate at Bank of America Merrill Lynch. “On the supply side, CNH cross-currency swap levels were low, which meant that the price of borrowing remained higher than in U.S. dollars for foreign issuers. At the same time, rates were being cut onshore, lowering the incentive of onshore borrowers to issue in CNH.”
There are signs that this may have been a temporary setback, however. Issuance has begun to rise in the last couple of months. “Since August, we have seen the market pick up again as the CNH has begun to appreciate against the U.S. dollar and CNH cross-currency swap levels have risen on higher inflationary concerns,” Malhotra says. With issuance so far this year exceeding 64 billion renminbi ($10.2 billion), the total for 2012 could still exceed the 2011 figure.
Meanwhile, dim sum bonds are coming to market outside of Hong Kong, particularly in London. The UK’s ambition to position London as an offshore renminbi trading hub has enjoyed some success: Energy group BP issued a 300-million-renminbi dim sum bond in London last year, and in April HSBC’s 2-billion-renminbi three-year issue aimed specifically at European investors was oversubscribed with orders of 4.4 billion renminbi. Last month ANZ Banking Group followed suit with a 1-billion-renminbi three-year bond listed in London.