Increasing Yuan Acceptance Drives Dim Sum Bond Demand

A new report from Fitch Ratings predicts that demand for dim sum bonds will grow significantly over the medium to long term, driven by increasing acceptance by global investors of the yuan as a major global asset and trading currency.

The report states that the strong demand for dim sum bonds so far in 2014, even though the Chinese currency weakened against the US dollar, is evidence of increased global acceptance of the yuan. There was record dim sum bond issuance equivalent to US$10.8bn in 1Q14, more than double 1Q13’s US$4.2bn. Total outstanding dim sum bonds (excluding certificates of deposit) now exceed the equivalent of US$64 bn.

A revival in issuance activity by China-based financial institutions and corporates with ties to the state drove issuance growth in 1Q14, according to the ratings agency. This growth continued during April and May 2014, even though the yuan fell 3.4% against the US dollar during the first four months of 2014.

The market for offshore yuan bonds remains a mere fraction of the size of the onshore yuan bond market, which stood at the equivalent of US$1.5 trillion at the end of 2013, underlining the potential for future growth. In addition, global investors increasingly view exposure to the yuan as an integral part of their portfolio diversification strategies to hedge against potential rises in US treasury yields and/or emerging market volatility. Dim sum bonds are also attractive to investors because they typically offer investors higher yields relative to comparatively rated US dollar denominated bonds, the report notes.

The Fitch report separately analyses dim sum bond issuance activity for corporates, financial institutions and sovereigns, comparing issuance by local and foreign entities. It also contains a listing of the 10 largest dim sum bond issuers for each of the three main sectors since inception of the market in 3Q07 and for 2014 year-to-date.

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