Tags: Dim Sum | China | Columbia | euro area

Hong Kong 'Dim Sum' Bond Market Becoming Market of Choice

Tuesday, 05 November 2013 12:09 PM Current | Bio | Archive

On Nov. 1, in Hong Kong, the Canadian province of British Columbia became the very first foreign sovereign-backed, triple-A issuer that sold successfully (oversubscribed!) 2.5 billion renminbi, or approximately $410 million, one-year bonds with a coupon of 2.25 percent in the so-called local "Dim Sum" market, which is also known as the offshore renminbi fixed-income market. The transaction was registered with the U.S. Securities and Exchange Commission, which allowed U.S. investors to participate for 40 percent in the deal.

A "Dim Sum" bond is a bond that is denominated in the Chinese national currency, the yuan/renminbi, and is issued offshore in Hong Kong. British Columbia's "Dim Sum" bond will be listed in Luxemburg. HSBC was the sole bookrunner for the issuance with the Bank of China and Industrial and Commercial Bank of China performing as co-managers.

By way of comparison, on Monday, in Canada, the Province of Quebec bonds that mature on Dec. 1, 2014, yielded 1.10 percent in Canadian dollars.

The Hong Kong "Dim Sum" market has since its start in 2007, but that really only became fully functional in 2010 because of the "liberalization measures" that were implemented that year, turned out to be the ultimate choice for investors to gain exposure to Chinese growth and to the appreciation of the yuan/renminbi.

I ask myself what could have been the real "rationale" for British Columbia to take on about $500 million Canadian dollar renminbi-labeled debt on its books when on Jan. 19, 2010, one needed 6.65 yuan to buy 1 Canadian dollar and on Oct. 30 you needed 5.58 yuan (lower means stronger renminbi) to buy 1 Canadian dollar, which represents an appreciation of 12.33 percent for the renminbi since January 2010.

The news release from the Ministry of Finance of British Columbia didn't really help me to discover their "straight" financial logic, which is, of course, not the same as their general logic as an autonomous government

Until now, it has been mostly corporations like Volkswagen, BP, etc. that are doing business on mainland China that have serious interest in financing their renminbi investments, even only in part, through Hong Kong "Dim Sum" CNH bond issues using the renminbi exchange rate as a natural hedge.

That being said, Hong Kong offshore "Dim Sum" bond issues are generally of short duration, but not limited to one year, and generate lower yields compared with those applied on the Chinese mainland market, but are also characterized by rather "thin" liquidity, which doesn't favor "trading" of these bonds.

Finally, it should certainly not be overlooked that for bringing the proceeds of a "Dim Sum" offshore bond issues into Mainland China, the issuer needs approval from China's State Administration of Foreign Exchange (SAFE).

Anyway, it surely will be interesting to see which explicit or implicit governmental issuers will start using these vehicles, for what amounts and at what rates they will come to the markets and finally where (yes, this is very important for all interested investors!) they will ultimately be listed, which could be Luxemburg or London, the two main contenders for these trades.

Whatever comes out, these Hong Kong "Dim Sum" offshore bonds, of which $8.9 billion have been issued so far this year, could further grow in importance and increase progressively their part in diversified international portfolios.

I think it could become really interesting to all types of investors who look for diversifying their investment locations to follow how this story evolves further in the context of the continuously growing interests in Asian local-currency bonds.

In Europe, the European Commission's economic forecast for the winter of 2013 shows an extremely fragile economy and it expects real GDP for the euro area to contract further by 0.3 percent on a year-to-year basis in 2013, before growing at 1.4 percent in 2014. Inflation is expected to continue to decline to 1.8 percent in 2013 and 1.5 percent in 2014 in the euro area. Yes, this is disinflation in full swing.

The euro area unemployment rates are expected to remain practically unchanged at a record high of 12.2 percent in 2013 and 12.1 percent in 2014, with France even rising from 10.7 percent in 2013 to 11 percent in 2014, Italy rising from 11.6 percent in 2013 to 12 percent in 2014 and Spain barely moving from 26.9 percent in 2013 to 26.6 percent in 2014, to cite only a few big economies.

And if all that wasn't bad enough, the report also says despite the "imposed" ongoing fiscal consolidation (austerity), debt-to-GDP ratios are still forecast to increase further in 2013 due to the more negative contribution of real GDP growth. Keep in mind this situation could cause serious disputes in Brussels among the member states. No, that doesn't bode well.

Last Thursday, Dominique Strauss-Kahn, former managing director of the International Monetary Fund, speaking at a conference in Seoul, South Korea, said the timid signs of economical improvement in the euro area over the summer were nothing more than an illusion while the "zone" will face low growth with practically no job creation for years to come. Because of that, the eurozone will have to face serious social and political problems.

I'm afraid, he is right. I can't see how long-term investors would negate these unfavorable fundamentals and take on risk in the eurozone today. As a long-term investor, I wouldn't disregard the words of Benoit Coeure, an executive board member of the European Central Bank, who recently said the euro area might suffer a Japanese-style lost decade.

I'd like to add the euro area situation is today in a far worse situation because Japan had full employment during its lost decade, while Europe faces a lost generation. And that's not an overstatement, you can bank on that!

By the way, Strauss-Khan also stated the importance of the dollar in terms of global trade and the fact that international finance "is going to stay as strong as it is today." On the global economic outlook, he said the world economy is apparently in a slow-growth trend, while, unfortunately, the world as a whole is suffering because of lack of global leadership and cooperation.

All that said, the European Commission also expects real GDP for the United States to come in at 1.9 percent in 2013 and 2.6 percent in 2014. For China it expects 8 percent growth in 2013 and 8.1 percent 2014. For Japan it expects it to grow at 1 percent in 2013 and 1.6 percent in 2014. Finally, for the world, it expects 3.2 percent growth in 2013 and 3.9 percent in 2014. No, not blistering growth numbers.

Finally, the United States and the dollar remain on top of my preference list, even though I still expect a sizable broad-based correction to occur in the foreseeable future.

These days, I certainly wouldn't spend my cash to invest for the long-term. I'm still convinced there will come better moments for long-term investing when we are patient enough to consider a one-to-two-year, or even somewhat longer, time horizon.

Of course, when these rare (generally, once to maximum two times in a lifetime) opportunities present themselves, cash will be king because many will have been blocked at the clogged "exits" of their earlier purchased investment vehicles.

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On Nov. 1, in Hong Kong, the Canadian province of British Columbia became the very first foreign sovereign-backed, triple-A issuer that sold successfully (oversubscribed!) approximately $410 million, one-year bonds with a coupon of 2.25 percent in the so-called local "Dim Sum" market.
Dim Sum,China,Columbia,euro area
Tuesday, 05 November 2013 12:09 PM
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