Dim Sum Bonds

What are Dim Sum Bonds?

Dim Sum Bonds are fixed debt instruments denominated in Chinese renminbi rather than local currency and quite popular in hong kong. These are quite attractive to investors interested in holding the debt issues denominated in yuan but are unable to do so due to increasing Chinese domestic debt regulation. These bonds can be sold by domestic as well as non-domestic entities, including corporations, financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more, and government.

How it Came into Existence?

Chinese authorities have actively promoted the development of the offshore bond market. Due to no limitations imposed on capital inflow and outflow, many countries have raised funds by issuing these bonds.

As the renminbi entered into global markets, demand has drastically increased from countries like Taiwan, London, Singapore, and Frankfurt who have also permitted issuances of renminbi bond. However, Hong Kong is still considered to be the largest issuer for dim sum bonds.

Characteristics of Dim Sum Bonds

Some of the characteristics are as follows:

Factors Affecting Demand of Dim Sum Bonds

The following are factors affecting the demand for these bonds.

Dim Sum Bonds

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Advantages

The different advantages are as follows:

  • Due to its high accessibility, the dim sum bond market has become an alternative renminbi fundraising platform for international issuers, which helps in promoting external use of currency by global firms.
  • The continuous issuance of offshore renminbi bonds by the ministry of finance has established a benchmark yield curveYield CurveA yield curve is a plot of bond yields of a particular issuer on the vertical axis (Y-axis) against various tenors/maturities on the horizontal axis (X-axis). The slope of the yield curve provides an estimate of expected interest rate fluctuations in the future and the level of economic activity. read more called dim sum bonds to measure its performance.
  • Due to the absence of restrictions on the type of issuers in the dim sum bond market, the issuer profile is quite diverse, ranging from small issuers to multinationals company. Non-bank financial companies and real estate developers are also active issuers in offshore renminbi bond markets. Developers often take the support of the dim sum bond market when liquidity dries up in the onshore markets. Hong Kong developers often use these funds to finance their construction projects in the on-shore market.
  • The demand for this bond mostly includes the need for foreign companies to support business in the onshore market and from firms to support outward direct investment. This market has played an important role in price discovery and acting as an intermediary for renminbi funds between onshore and offshore markets.
  • Large multinationals such as McDonald’s, Unilever participated as an issuer in dim sum bonds raising capital to fund their equipment, expanding, setting up production plants. due to strong credit quality and huge demand for renminbi bonds, the coupon rate is quite lower as compared to AAA bonds with a similar maturity.

Disadvantages

The different disadvantages are as follows:

Conclusion

Dim Sum Bonds has played a very important role by increasing the participation of international issuers to capture offshore renminbi funds to support their business and investment activities.

This has been a guide to dim sum bonds and its definition. Here we discuss characteristics and factors affecting the demand for dim sum bonds. We also discuss the advantages and disadvantages. You can learn more from the following articles –

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