Investors Feast on High Yield Dim Sum Bonds

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The amount of money raised in the junk "dim sum" bond market reached a record high in the second quarter driven by a rising Chinese property market and the worldwide search for higher yielding assets.

Issuance of renminbi-denominated bonds in Hong Kong is four times higher than in the first quarter, and the largest on record for junk-rated groups at Rmb13 billion, according to Dealogic.

Demand was helped by the buoyant demand for riskier assets in the first part of the quarter amid strong central bank bond buying. This provided the backdrop for the largest ever junk dim sum bond by Greentown China Holdings in early May.

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Most of the issuance was from Chinese property companies, helped by rising prices. The number of cities with year-on-year price growth increased to 68 in April from 67 in March, the highest level since October 2011, according to Moody's.

The second quarter hit a record for issuance despite the fact that the market was largely shut in June after the US Federal Reserve caused gyrations across the global bond market after laying out a program to scale back quantitative easing.

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But total dim sum volume still stands at Rmb49.2 billion so far this year, up 22 percent from the same period last year and the highest volume on record, according to Dealogic, in a sign that the still small market is gaining in stature.

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Issuance was also helped by the lower borrowing costs compared to the dollar market.

"Chinese companies have generally been able to borrow cheaper from the dim sum market for much of this year than from the dollar market as they had a more captive base of investors looking for yield," said Bryan Pascoe, global head of debt capital markets at HSBC.

Issuance in the dim sum market, which only started in 2007, has traditionally been dominated by mainland Chinese companies, but foreign groups have started to issue bonds there as well as the market becomes increasingly international.

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A small number of international companies have sold dim sum bonds, including McDonald's, the fast-food chain, Tesco, the UK supermarket group, and KfW, Germany's national development bank.

The first dim sum bond issued in London came in April last year from HSBC, which raised Rmb2 billion. The internationalization of the dim sum markets is seen by economists as a key step in a policy initiated by Beijing in 2009 to facilitate greater use of the renminbi for trade.

But Fitch warned in a recent note that the market still had a way to go. "Fitch believes the dim sum bond market remains in a nascent stage, with significant growth potential over the medium to long term."