What are Dim Sum Bonds - Statistics Project Example

Before delving into a discussion about the future of so-called “Dim Sum bonds” an adequate understanding of the past is first required. This debt is denoted in mainland Chinese currency, the Yuan, but issued offshore in Hong Kong (Fi 2011). Investors who are interested in owning Yuan-denominated debt are drawn to this market due to strict capital controls imposed on the mainland. International RMB denominated debt offerings are therefore necessary.  RMB denominated bonds have commonly been recognized as a significant step along the path to the use of the RMB as an international currency.

However, it is possible to understand these bonds in the context of the function they serve without adapting a forward-looking perspective. Dim sum bonds serve a variety of purposes. For instance, there is a significant demand for capital among Chinese small businesses. In developing a mature bond market, Chinese business owners will no longer need to rely on the shadow banking system for capital (Sanderson, 2012). Debt issuance will also provide some risk relief to China’s state-owned banks, which currently hold 75% of the nation’s debt.

Guo Shuqing, head of the Chinese Securities Regulation Commission, noted that “overreliance on bank credit in a financial system can, under certain circumstances, lead to systemic risk”. Furthermore, all firms have historically had a significant incentive to issue Yuan-denominated debt. A combination of high demand, low supply, and a growing amount of yuan deposits held in Hong Kong, has resulted in low yields, translating into reduced borrowing costs for companies with mainland operations (Law and Wei 2012).

Although, in recent months, demand has diminished somewhat. A large driver of demand for RMB denominated debt was the assumption that the currency would slowly appreciate against the USD. This so-called one-way bet has some undone, as the rate of appreciation has eased in light of economic concerns, particularly given evidence of slowing economic growth in China. Of course, it is impossible to ignore China’s great aspirations in a discussion of RMB denominated bonds. Further fueling the rise of the yuan is China’s interest in reducing their reliance on the USD.

As of 2011, China held nearly 3.2 Trillion USD. With soaring budget deficits in the United States and constant political strife, there is legitimate concern about these holdings. With a bet of this magnitude, reduced reliance on the dollar is obviously essential to ensure China’s future. History illustrates that widespread currency adoption typically results in cheaper debt financing- look no further than the United States for an example (Barboza, 2011). The expected appreciation of the RMB will only drive the demand for the currency, which has more than once been described as a safe haven (Noble, 2012).

The first dim-sum bond was issued in July 2007 by China Development Bank. Until July 2010, only Chinese banks have been allowed to issue bonds denominated in yuan, the basic unit of the renminbi- after which, all banks were permitted. In 2009, regulators allowed firms in China’s wealthiest provinces to settle trade in yuan, this was extended to the entire country in 2011 (China's Currency, 2011). Moreover, government officials have been encouraging neighbors like Russia, Vietnam, and Thailand to settle their trades in RMB.

Regardless of whatever plan China has put in motion, Nobel Laureate Robert Mundell, suggests that the RMB will become a global currency regardless of what actions the regulators take (Barboza, 2011).