Introduction to Dimsum Bond
Dimsum bonds are debt instruments that are similar to euro bonds and are issued outside of china by a chinese company or foreign company but denominated in chinese renminbi and also settled in RMB.
Dim sum bonds were initially issued in hongkong and were named after renowned cuisine in hongkong, dim sum. In 2007, Chinese development bank first issued the dimsum bond. Till 2010, only entities from hongkong and china could issue these bonds. After which, changes in policy by chinese government and deregulation included foreign corporations and entities, e.g, McDonalds to issue renminbi-denominated bonds. China construction bank was the first bank to issue dim sum bonds in london in 2012 followed by non-chinese banks such as HSBC and banco dabrasil.
How it Works?
In order to raise money in assets that are denominated in chinese renminbi, international investors may participate in dimsum bond markets. foreign companies who are willing to invest in debt issued in renminbi or yuan but are not able to do so due to strict debt regulations incorporated by chinese government can do so by investing in dimsum bonds as these bonds do not require approval from people’s republic of china (PRC) or chinese/hongkong authorities.
Synthetic Dimsum Bonds: Bonds that are issued in chinese renminbi but settled in some another currency such as EUR are called as synthetic dimsum bonds or RMD bonds.
Features of Dimsum Bonds
Some of the features are given below:
- Investors: The investor base for dimsum bonds is very less as compared to US bonds. Mostly investors of dim sum include private banking clients, international investors, commercial banks.
- Credit Rating: Credit rating is usually market-driven for dimsum bonds and is as similar to other foreign bonds issued by chinese entities and are not affected by currency.
- Liquidity: Liquidity of dim sum bonds is still moderate.
- Maturity: Maturity for dim sum bonds is mostly 3 years or less.
- Security: Investors security is still being evolved and is quite low as compared to US bond market.
Components of Dimsum Bond
Below are the components:
- Face Value: the Par value or principal amount that the bond issuer has to repay the investor at maturity or at the expiration of the contract.
- Coupon Amount: the amount that the bond issuer will pay on each coupon dates to the investor. sometimes instead of coupon amount, the coupon rate is provided by the issuer.
For example, a 10% coupon rate on 100$ face value means that investor will receive 10% x $100 face value = $10on each coupon date.
- Coupondates: the dates on which the bond issuer will pay the Coupon amount to the investor. In US, usually semi-annual coupons are paid, i.e., a bond issuer will pay Coupon amount to bondholder after every 6 months.
- Maturity Date: the date on which the bond will mature or the date on which the contract between the bond issuer and bondholder ends and the issuer will pay the investor face value of the bond.
- Issue Price: the original price of the bond at which the bond issuer sells the bond.
- Yield to Maturity: The expected rate of return if a bond is held until it matures.
Bond Valuation
Bond price is the present value of all the future cash flows generated by a bond. It refers to the sum of the present values of all coupon payments plus the present value of the face value at maturity. bond price(p0) for a coupon bond with coupon amount (c ), face value (f), maturity (t), yield to maturity (r) can be calculated as:
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An example of bond valuation for a single yield coupon bond is provided in an excel sheet.
Factors Affecting Dimsum Bonds
- Yield: The continuous raise in demand of dim sum bonds has led the bond yield to strangely low levels with credit spread declining from positive to negative in 2015.
- Hedging Costs: Costs includes hedging affects overall funding costs, which often impact the issuance of dim sum bonds.
- Currency Volatility: The abrupt ups and downs of chinese yuan can impact the issuance of dim sum bonds.
Advantages of Dimsum Bonds
Some of the advantages and disadvantages are given below:
Advantages
Some of the advantages are given below:
- Diversified Issuers: Due to no restrictions on the type of issuer, anyone from small investors to multinational companies can issue dim sum bonds. NBFC’s and real estate developers are also issuing dimsum bonds.
- Chinese Renminbi Exposure: An investor who is interested in raising fund in renminbi can use dimsum bonds as one way to gain exposure.
- Low Coupon Rate: Due to high credit quality and growing demand for renminbi bonds, the coupon rate is quite low as compared to other high rated bonds.
- Hedging: If an investor has already invested in the chinese economy and want to reduce exposure to exchange rate risk, he can simply do it by hedging. investing in renminbi by using bonds can be suitable to hedge the exposure.
Disadvantages
Some of the disadvantages are given below:
- Economy Risk: Investing in dim sum bonds brings up an additional risk due to government or market instability of the chinese economy. Sudden changes in political situations may incur losses.
- Risks that Hard to Quantify and Correlated: Dimsum bonds may be used to raise exposure in the renminbi. abrupt changes in currency value and in cases of economic crisis, it gets difficult to quantify the risk associated and deduce the correlation among several factors.
- Volatility: The issuance of dim sum bonds have decreased on recent past due to high volatility and china’s low economic growth.
- Availability of Panda Bonds in Market: Panda bonds are almost similar to dim sum bonds except that panda bonds can be issued in china by foreign entities. In this case, domestic investors are the main target for foreign issuers, while in the case of dimsum bonds, international investors are the major investors.
Conclusion
Dim sum bonds are similar to euro bonds and are issued outside of china but denominated in chinese renminbi and also settled in RMB. Dimsum bonds are very much suitable for investors who want to raise funds in the renminbi. but at the same time, dimsum bonds brings up currency and country specific risks.
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