Benchmark could make dim sum bonds more appetizing

Indices add transparency, could boost ETFs.

May 9, 2013

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dim sum_edited-1Investors had high hopes for dim sum bonds when they were first introduced in 2007—finally, they had a vehicle that would give them access to yuan-denominated assets. And while the market has continued to grow steadily since that time, 2012 seemed to reverse the positive trend and investors lost their dim sum appetite over the diving Chinese currency and the slowing Chinese economy. Without the potential for currency appreciation, dim sum bonds suddenly didn’t look as tasty.

Last month, however, a key development was announced that could breathe new life into the dim sum bond space—it could also be a game changer in how investors view Chinese bonds. FTSE and the Bank of China (HK) announced plans to set up a series of indexes that would track offshore renminbi debt—not just the broader market but also sovereign bonds, investment-grade bonds and shorter-term Chinese government bonds.

Indexes such as these open up a huge door for the exchange-traded fund space—imagine the number and range of products that could be developed to track these indexes across such a wide range of debt products. It’s a compelling idea for investors, especially if we continue to see the yuan appreciate and the Chinese economy continue to chug along at even a marginally higher rate than developed markets.

More importantly, however, benchmarks such as these introduce a vital new layer of transparency and data-driven rigour to how we view yuan-denominated fixed income assets. Right now, the dim sum market is unrated, but with a big-name index coming to town, it might encourage issuers to get their debt rated by big agencies (as has been suggested by the Financial Times’ Josh Noble). This, in and of itself, could be a watershed moment for issuers in a country where that level of transparency can be very hard to come by.

This could certainly open up the doors to more institutional investors, including pension funds.

It’s an interesting proposition—and a new and important window onto how Chinese companies are valued.

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