Nicknamed “dim sum bonds” after Hong Kong’s favorite dining pastime, the securities are the hottest financial innovation in town.
“It’s probably the fastest-growing market I’ve seen in my career,” says Tee Choon Hong, a banking veteran now at Standard Chartered.
Dim-sum bonds have come into their own this year. The first dim-sum bond was sold by China Development Bank in July 2007. That maiden sale was a solid indication of China’s interest in promoting its currency in global trade and investment via yuan-denominated bonds: CDB is one of three banks in China responsible for raising funds for infrastructure projects such as the Three Gorges Dam and Shanghai Pudong International Airport.
Until July 2010, only Chinese and Hong Kong banks were allowed to issue bonds denominated in yuan, the basic unit of the renminbi. Now all banks can.
The surge in Hong Kong this year has been electrifying, says William Liu, a Hong Kong-based partner at Linklaters, an international law firm.
“The changes are so rapid that I have to amend my slides every time I give a presentation,” Liu says.
The appetite for dim-sum debt is one of the few bright spots in the Hong Kong economy. Gross domestic product edged up 0.1 percent in the third quarter from the previous months, compared with a 0.4 percent contraction in the second quarter, as Europe’s crisis created a drag on overseas sales.
Exports declined in September for the first time in two years. The Hong Kong stock market fell 21 percent in the third quarter, its worst run in a decade.
Donald Tsang, the city’s chief executive, said Nov. 12 that Hong Kong’s economy faces “some shocks” in coming quarters. The government lowered its estimate for the full-year expansion to 5 percent from a range of 5 percent to 6 percent in an August estimate.
Against this backdrop, the dim-sum bond boom has cheered bankers in Hong Kong, one of two former colonies designated as special administrative regions by Beijing. (The other is Macau.)
“The offshore yuan business offers one of the most exciting new opportunities for Hong Kong,” says Gina Tang, head of debt capital markets for Hong Kong and China at HSBC Holdings. “Banks are actively recruiting to build up their teams.”
Sales of dim-sum bonds rose from the third quarter of 2010 onward following a decision by the Hong Kong Monetary Authority to give companies greater freedom to sell yuan bonds.
At the same time, China made it easier for corporations to settle trades in the Chinese currency.
With Hong Kong’s currency — the dollar — pegged to the U.S. greenback and its near-zero interest rates set by the U.S. Federal Reserve, the former colony offers bargains for mainland Chinese visitors as well as borrowing costs that are lower than China’s, which were set at 6.56 percent in July.