Dim sum bond issuance hits record in first quarter
Dim sum bond issuance hit a fresh record in the first quarter, with US$10.8 billion issued in offshore yuan bonds in the first three months. This was more than any other quarter, according to a report from Fitch Ratings.
Volumes were nearly double the rate of issuance seen in the first quarter of 2013. This record came despite a rare depreciation of 3.4 per cent in the yuan versus the US dollar in the first quarter.
"The size of the dim sum market is just a drop in the bucket [of the total yuan bond market] … the long-term trend is clearly up," said Matt Jamieson, a Sydney-based analyst for Fitch and the lead author of the report.
Total outstanding dim sum bonds increased to US$55.5 billion in 2013 from US$24.7 billion in 2011. However, the market is still just 3.7 per cent the size of China's domestic yuan bond market, measured by outstanding issuance, according to Fitch.
Jamieson said mainland issuers see the cross-border yuan market as attractive, with better pricing than in the mainland's closed onshore market.
The three-month Shanghai interbank offered rate is 4.98 per cent. One-year cross-currency swap rates, a benchmark used by offshore investors to price yuan instruments, indicates investors want a 1.7 per cent fixed rate in yuan in exchange for US dollar London interbank offered rate. In other words, the reference rates for yuan is lower in offshore markets compared with onshore.
Jamieson said dim sum bonds were one of the best performing assets globally from April to September last year. This was a time of significant sell-offs in emerging market assets.
The yuan stayed strong, and so did the prices for dim sum bonds. "They stood the test," Jamieson said.
International investors increasingly see the yuan as a major international currency to which they need exposure, and are slowly adding dim sum bonds to their portfolios.
The Chinese government is also internationalising dim sum issuance. The Bank of China has been establishing clearing lines in markets such as Frankfurt, Luxembourg, London and Singapore, followed quickly by issuance of yuan bonds by Chinese policy banks into those markets. Each market uses its own shorthand for the instrument: Singapore calls them Lion City bonds; Frankfurt traders have dubbed yuan debt Goethe bonds.