What is a Dim Sum Bond?
The low-sum bond is a bond denominated in Chinese renminbi and issued in Hong Kong. Low-sum bonds are attractive to foreign investors who want to be exposed to assets denominated in renminbi, but Chinese capital controls do not allow them to invest in Chinese domestic debt.
The term is derived from dim sum, a style of cuisine popular in Hong Kong that involves serving a variety of small specialties.
Dim Sum obligations explained
International investors wishing to participate in the Chinese renminbi-denominated market (RMB) can turn to the low-sum bond market. Low-value bonds are issued in Hong Kong by Chinese and foreign companies who prefer to avoid strict securities laws set by regulatory authorities in the People’s Republic of China (PRC). In other words, low-sum bonds are attractive to investors interested in holding debts issued in yuan, but are unable to do so due to Chinese domestic debt regulations. Multinational companies, even those not present in China, can issue low-value bonds to professional investors without seeking approval from the Chinese authorities or the PRC. After issuance of these bonds, multinational issuers can freely use their products in Hong Kong without regulatory approval from the PRC. The product can also be used to settle cross-border transactions.
As approval from the PRC is not required, the small bond market appeals to investors looking to diversify their holdings. In addition, investors who bet on the appreciation of the RMB can also use the low-sum bond market. This bond market also allows China to regulate the amount of offshore yuan that returns to the continent.
The dim sum bond is frequently compared to panda bonds. Panda bonds are onshore debts denominated in renminbi issued in China by foreign companies. The panda market is used as a capital raising platform for foreign companies targeting domestic investors and, therefore, domestic investors are the main buyers of these bonds. Conversely, the dim sum offshore bond market is dominated by international investors.
The Dim Sum Bond Index is a market capitalization weighted index that measures the performance of dim sum bonds denominated in RMB issued and settled outside of mainland China. Its top 10 issuers by market weight were RPC, Bank of China Ltd., Lenovo Group Ltd., China Development Bank Corp., Asian Development Bank, Beijing Enterprises Group, Beijing Enterprises Water Group, Export-Import Bank of China, China Construction Bank Corp. and International Finance Corp. This index is managed by Citigroup and rebalanced once a month.