Dim sum bonds under pressure from cheaper yuan and rise of panda bonds

Dim sum bonds, once the darling of investors and foreign firms seeking Chinese funding, have been feeling pressure from a cheaper yuan and the rising popularity of panda bonds.

The cheaper yuan means a decline in the value of dim sum bonds – yuan-denominated debt sold in the offshore market in Hong Kong – and that makes them less attractive to investors compared with bonds denominated in strengthening currencies, primarily the US dollar.

Since August 11 last year until last week, onshore yuan traded in Shanghai has weakened 7.14 per cent against the US dollar while offshore yuan traded in Hong Kong is down 7.36 per cent during the same period.

According to data from Thomas Reuters, the total amount raised through dim sum bonds in 2015 was 163.3 billion yuan versus 337.7 billion yuan in 2014. The amount raised so far this year is 76.2 billion, less than half of last year.

“Expectations for a weaker yuan has to some extent dampened investor enthusiasm [for dim sum bonds],” said Ying Jian, senior analyst at the Bank of China (Hong Kong).

However, from the point of view of the companies seeking to raise funds, “yuan-denominated bonds are becoming more attractive”, said Tony Chen, a credit analyst at Nomura International (Hong Kong).

“With an interest rate hike by the Federal Reserve approaching, which will increase funding costs for companies issuing or servicing USD-denominated bonds, many companies are choosing to reduce US dollar debt and increase yuan-denominated debt,” said Chen.