Book Review: Dim Sum Bonds

Let’s start with a definition. Dim sum bonds are, as the subtitle says, “The offshore renminbi (RMB)-denominated bonds.” Since 2007 they have been issued in Hong Kong and, as such, are available to investors worldwide. Dim Sum Bonds, coauthored by Hung-Gay Fung, Glenn Ko, and Jot Yau (Wiley, 2014), offers a “panoramic view of [this] bond market that has played a pivotal role in China’s grand scheme of making the RMB a global reserve currency.” (p. xii) The offshore RMB market also serves two other major goals of the Chinese government: to “control smooth cross-border capital flows to China so as to harness the inflation in mainland China” and to tap foreign capital. (p. 4)

The RMB bond market serves not only the Chinese government and Chinese financial institutions. Foreign firms operating in China who need RMB funding “can raise longer maturity RMB funding through the dim sum bond market instead of relying on shorter-term borrowings from Chinese banks.” (p. 18) The first foreign company to take advantage of the RMB bond market was McDonald’s; since then Caterpillar, Ford, Unilever, BSH Bosch, and Siemens have also issued bonds. Foreign corporations account for 6.15% of the total number of issues and 8.84% of the total RMB amount. They are, as one might suspect, dwarfed by banks (predominantly Chinese), which make up just over 50% of the total RMB amount.

Who invests in the nascent dim sum bond market? The major holders are investors based in Asia, but the authors predict that interest in this market will become more global. It’s too early to say whether dim sum bonds can be considered an asset class and whether they play an efficient diversification role in portfolios. Between 2011 and 2013 the Bank of China (Hong Kong) Dim Sum Bond Index showed relatively low or, in a few cases, negative correlations with other assets such as the JPM Global Aggregate Bond Index and Barclays U.S. Aggregate Bond Index, the Nikkei 225 in equities, and the Japanese yen, Brazilian real, and British pound sterling in exchange rates.

Even though individual investors are unlikely to buy dim sum bonds in the near future, this book is still worth reading. It sheds light on Chinese currency issues as well as on Asian investor sentiment. And it is vital for anyone who wants to know more about the offshore RMB bond market.