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Dim Sum bonds are back on the menu
Dim Sum bonds are back, for now
Jonathan Rogers 1 Nov 2017

Is the Dim Sum bond market about to come back from the dead? The market for renminbi bonds issued in Hong Kong sank, almost without trace, just over two years ago when China stunned global markets by devaluing its currency over two consecutive days in August, sending global equity and commodity markets into a tailspin.

For most of the last two years there has been no public Dim Sum issuance, thanks largely to a generally negative view of the medium- to long-term outlook for the renminbi and a less than benign cross currency basis swap, making issuance in Dim Sum prohibitively expensive.

But the signs are of a market revival, with issuance now becoming viable thanks to a narrowing of the basis and a slightly more upbeat assessment of the renminbi’s future direction.

Last week, Singapore-based BOC Aviation, an aircraft leasing company, printed 1-billion-yuan of three-year Dim Sum paper. Hot on the heels of this issuance, automaker BMW brought a similar size and tenor deal. The deals, rated A-/A- (Moody’s/S&P) and A1/A+ (Moody’s/Fitch) respectively, came at 4.5% and 4.25%.

The deals were driven by the ability to swap at competitive term funding rates versus Sibor and Euribor rather than a need for end user renminbi proceeds, and heralds the return of the Dim Sum market, albeit perhaps briefly, while an uncertain rate outlook in the US and Eurozone cheapens up forward fx on the swap curves. Two other deals were also printed for Canadian banks almost three weeks ago, to test the appetite for Dim Sum among investors as the arbitrage window opened from a funding perspective.

The question is how resilient this issuance wave proves to be. There’s no doubt that the economic outlook for China has improved, with optimism extended to the country’s banking system. Non-performing loans appear to have stabilized, the shadow banking system is in retreat thanks to tighter monetary conditions and bank profitability is edging up.

There are reasons to be cheerful too about the Green financing wave which is propelling the renewable energy sector forward in China.

The hope is that GDP growth can reassert itself confidently above the 7% per annum mark, and that hence a trend for the secular appreciation of the renminbi which underpinned the Dim Sum market in its glory days five or six years ago can return.

A question mark exists about the potential for the domestic Chinese bond market to be able to suck up available funds via the Bond Connect programme, which allows offshore investors to participate in mainland primary debt offerings out of Hong Kong. That is arguably the case at the moment, with a decent yield and ratings pickup available in the onshore renminbi market of around 30bp to move up the curve from Single A to Triple A.

The closure of that yield spread should add momentum to Dim Sum issuance, assuming the arbitrage window for issuers doesn’t close first.

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