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The birth of the dim sum bond market, offshore renminbi debt sold outside China, was a gift to headline writers keen on food-related puns. But it also provided something much needed for international investors: a new way to invest using the Chinese currency.
After a period of rapid growth, this year appetite for dim sum bonds has cooled as China speeds up the opening of the far bigger domestic renminbi credit market. Though not an immediate prospect, some observers are beginning to wonder whether the dim sum market is now on borrowed time.
Chinese authorities have taken a number of steps this year to open the onshore market to more foreign involvement. In May, more than 30 overseas financial institutions, including HSBC, Morgan Stanley and BNP Paribas, were given regulatory approval to access the interbank bond market by the People’s Bank of China.
Then, in mid-July, the PBoC tweaked its rules so that central banks, supranational organisations such as the World Bank and sovereign wealth funds could all buy onshore bonds without the need for prior approval.
Both moves can be viewed as part of China’s broader efforts to open its financial markets to more global capital and increase use of its currency abroad. Other measures on this front include the launch of the Shanghai-Hong Kong Stock Connect last year and the loosening of rules to allow companies to move money in and out of China more freely.
Ryan Song, head of markets for China at HSBC, says that foreign participation in the onshore bond market is still quite limited, but has huge potential for growth.
“The market is developing really fast,” says Mr Song. “We see a lot of client interest.”
The appeal of the onshore market for foreign investors is clear. At almost $6tn in size, it is now the world’s third largest credit market after the US and Japan and has a far more diverse range of investments than the dim sum market.
Yields are typically higher, duration longer and trading more liquid, all important factors at a time when global investors are scratching around for income and concerns are growing about bond market liquidity in the west.
Perhaps more important is the prospect of currency diversification. At the moment, offshore renminbi assets remain scarce compared with the size of China’s economy and its clout in global trade. The dim sum bond market simply cannot meet the needs of the global investor community, which are set to grow as China’s currency becomes more widely used.
Later this year, the International Monetary Fund will decide whether to add the renminbi to its special drawing rights basket, which could increase demand for holding renminbi assets.
In preparation for increased overseas involvement, FTSE Russell launched a new onshore bond index in March that tracks domestic Chinese credit, after receiving requests from asset managers and governments.
Multinational corporate borrowers are also beginning to peer over the border. Last year, German automaker Daimler became the first company to sell a so-called panda bond, renminbi debt issued inside China by a foreign entity. But others are expected to follow suit as regulations are eased.
Geert Peeters, chief finance officer at Hong Kong-based power producer CLP, believes the dim sum market may ultimately be remembered as an “oddity of history” and says his company is keen to issue a panda bond when the time is right.
However, the onshore market does have its downsides too, both for issuers and investors.
One major concern is pricing. Local government debt is expected to become a leading new source of issuance in the market, as Beijing looks to shift credit risk away from commercial banks and on to a broad investor base. Already Rmb2tn of municipal bonds have been approved.
Foreign investors have struggled to assess the true credit risk associated with local government or state-backed corporate borrowers, which locals often see as risk-free due to an implicit guarantee from Beijing.
The legal framework is another consideration. Offshore bonds are sold using some combination of Hong Kong, UK or US law. This gives investors greater comfort of their legal protection in the event of a default.
Oliver Brinkmann, head of greater China capital markets at Deutsche Bank, says the dim sum market still offers issuers far more flexibility than going onshore, especially should they wish to switch the money raised into another currency, while problems around liquidity and duration are likely to fade as more investors get involved.
So rather than calling the end of the dim sum market, many investors and analysts believe the onshore and offshore will gradually meld into one as the walls between the two are slowly broken down.
“Sooner rather than later we could see some convergence. The dim sum market could converge into the onshore market,” said Sean Chang, head of Asian debt investment at Baring Asset Management. “One day we might just have one renminbi market.”