'Dim Sum' bonds – yuan-denominated instruments issued through Hong Kong – are set to become a major market as investors look for alternatives to Western issuance and exposure to China, according to one investment manager.
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China sold off $3.1 billion worth of yuan-denominated 'Dim Sum' bonds – traded offshore in Hong Kong – on Wednesday, the largest auction of its kind to date.
The Dim Sum bond market is a fraction of the size of total Chinese domestic issuance, but demand is outstripping supply, and the market is expected to grow, Andy Seaman, executive partner at fixed income manager at Stratton Street Capital told CNBC.
"If you look at bond markets in the West and the policies taken by governments what they are effectively doing is trying to devalue their currencies. Look at what the Fed has been doing by keeping interest rates on hold till 2013, the dollar is going to be debased so there is the need for an alternative, and the Renminbi (yuan) market offers that," Seaman said.
"We are very interested in the whole market but it is very expensive, so we tend to buy them as dollar bonds and then hedge them in Renminbi, because they tend to be around 200 basis points more expensive than locally-traded bonds."
However, Seaman argued that the restrictive nature of the market limited a more widespread appeal in the short term as demand failed to keep up with supply. Increasingly people would have more exposure to the market as it grows.
"It is a heavily controlled market and the issuance sizes are restricted and demand massively exceeds supply. That it is heavily controlled is the way the Chinese approach it.
Like any developing market they take it at a slow and steady pace to make sure that it functions correctly, but it will grow," Seaman added.