Hong Kong's Dim Sum Bonds: Feast or Famine?

by Cesar Bacani, 08 February 2011

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Corporate Finance Finance and Banking

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dim sum bond exchange rate funding cost renminbi appreciation synthetic RMB bond

At the Asian Financial Forum 2011 in Hong Kong in January, Financial Secretary John Tsang toasted dignitaries and other guests at the cocktail reception and then took the stage to talk about – dim sum.

Not the tasty, bite-sized snacks that office workers typically consume for a hurried meal, but a new financial instrument denominated in renminbi.

“In the past year or so, the term ‘dim sum’ has taken on a whole new connotation in the form of the so-called ‘dim sum bonds,’” Tsang explained. “It is the nickname given to bonds denominated in renminbi and issued in Hong Kong . . . This new financial instrument was born out of the necessity to internationalise the Chinese currency in the current climate of financial opening up and reform on the Mainland.”

For CFOs, there’s a lot of yuan in Hong Kong to tap, and the pile continues to grow. Some 300 billion renminbi (US$45.5 billion) is currently sitting idle in Hong Kong’s banking system, earning next to nothing in interest but still expanding as much as 45% month-to-month in the last quarter of 2010, according to Moody’s Investors Service.

Some savvy finance chiefs have jumped in. Last August, McDonald’s issued an investment-grade two-year dim sum bond that paid just 3% a year. Three months later, earth-moving equipment maker Caterpillar floated a 2%-per-annum dim sum that raised the equivalent of US$156 million. The issue sold out within 20 minutes and was seven times oversubscribed.

At the moment, it’s looking distinctly like a bond seller’s market. “High demand from, for example, private banking clients, has frequently led to oversubscription . . . as supply has failed to keep up,” Moody’s observes in a report. As of January this year, dim sum bonds have soaked up just 66 billion renminbi (US$10 billion) of the yuan deposit base, less than a quarter of the total.

Even sub-investment grade names are finding eager buyers. In December, Hong Kong casino operator Galaxy raised the equivalent of US$207 million on a junk bond (rated B3 stable by Moody’s) that had a yield of around 4.6%. In contrast, MGM Resorts International is paying more than twice that in annual interest on its US dollar debt.

Case-by-Case Basis

In theory, any company can issue a dim sum bond. “For offshore RMB financial instruments, there is very light regulation,” says Ivan Chung, who is Vice President and Senior Analyst at Moody’s. “And so, as long as there is a market and investors are willing to buy, any organization can issue a dim sum bond.”

The problem is how to bring back the yuan proceeds to China. McDonald’s, Caterpillar and other companies that have issued dim sum bonds had to apply to the Chinese government to be allowed to do so.

Again in theory, such approval should not be too difficult to obtain, because it is to China’s interest that the foreign direct investment flooding into it should already be sterilized and therefore will not contribute to inflationary pressures. That’s because the monetary authorities would not need to issue more renminbi, which they would need to do if the FDI were in US dollars.

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