DEFINITION of 'Dim Sum Bond'

Dim sum bond is a bond denominated in Chinese renminbi and issued in Hong Kong. Dim sum bonds are attractive to foreign investors who desire exposure to renminbi-denominated assets, but are restricted by China's capital controls from investing in domestic Chinese debt.

The term is derived from dim sum, a popular style of cuisine in Hong Kong which involves serving a variety of small delicacies.

BREAKING DOWN 'Dim Sum Bond'

International investors who are looking to participate in the Chinese renminbi-denominated (RMB) market may look to the dim sum bond market. Dim sum bonds are issued in Hong Kong by Chinese and foreign companies that prefer to avoid the stringent securities’ laws set by regulators in the People’s Republic of China (PRC). In other words, dim sum bonds are attractive to investors interested in holding debt issued in yuan, but are unable to do so due to Chinese domestic debt regulations. Multinational companies, even those without a presence in China, can issue dim sum bonds to professional investors without seeking approval from either PRC or Hong Kong authorities. After issuing such bonds, multinational issuers may use their proceeds freely in Hong Kong without PRC regulatory approval. The proceeds may also be used to settle cross-border trades.

Since PRC approval is not required, the dim sum bond market is appealing to investors seeking to diversify their holdings. In addition, investors who bet on RMB appreciation can also use the dim sum bond market. This bond market also allows China to regulate the amount of offshore yuans that flow back into the mainland.

The dim sum bond is frequently compared to panda bonds. Panda bonds are onshore yuan- or renminbi-denominated debt issued in China by overseas companies. The panda market is used as a capital-raising platform for foreign firms targeting domestic investors and, hence, domestic investors are the main purchasers of these bonds. Conversely, the offshore dim sum bond market is dominated by international investors.

The Dim Sum Bond Index is a market capitalization weighted index that measures the performance of RMB-denominated dim sum bonds issued and settled outside Mainland China. As of February 28, its top 10 issuers by market weight were PRC, 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 at month end.

 

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