Dim Sum Bonds vs. Panda Bonds

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Written By
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Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.

Dim sum bonds are securities denominated in offshore Chinese currency, known as the Renminbi (RMB) or Yuan (CNY).

They are issued in Hong Kong and used for raising capital from international investors.

Dim sum bonds generally offer higher yields than domestic Chinese bonds and provide access to RMB investments, which provides a source of currency diversification.

Panda bonds are credit instruments issued by foreign entities in the Chinese domestic market, denominated in yuan. They allow foreign entities to access the Chinese market and tap into the country’s large investor base.


Key Takeaways – Dim Sum Bonds vs. Panda Bonds

  • Dim Sum Bonds are issued in Hong Kong by companies registered outside of China and often have relatively high yields.
  • Panda Bonds, on the other hand, are issued inside China by both foreign and domestic companies and come with lower yields than Dim Sum Bonds.
  • When investing in Dim Sum bonds, investors should do their own due diligence to evaluate the creditworthiness of the issuer, rate of return potential, currency risk associated with the bond, liquidity, fees and taxes charged on transactions, and compare it to other investment options.
  • Exchange rate fluctuations can have an impact on the value of Dim Sum Bonds which makes them more volatile than Panda Bonds.


Why Do Traders/Investors Buy Sim Sum Bonds?

Investors typically buy dim sum bonds to diversify their portfolio and capitalize on the potential appreciation of China’s currency over the long term.

Dim sum bonds can be held until maturity or traded in secondary markets.

Dim sum bonds can serve as an attractive investment option for investors who are looking for higher yields than domestic Chinese bonds and access to RMB investments without assuming excessive risks associated with emerging market debt instruments such as Eurobonds.

By providing a hedging mechanism against fluctuations in the value of other currencies relative to the RMB, dim sum bonds can help provide investors with a reliable and secure way to diversify their portfolio.

Furthermore, the regulatory environment governing dim sum bonds is relatively stable, providing investors with greater assurance of safety when investing in these instruments.


When Did Sim Sum Bonds Start Being Issued?

Since issuance began in 2007, dim sum bonds have become popular among international investors due to their attractive returns and low default risk compared with other emerging market credit investments.


Dim Sum Bond Market Size

The market size of dim sum bonds has reached over $200 billion in outstanding issuance.


Dim Sum Bond Regulation

The regulatory environment governing dim sum bonds is also relatively stable compared to other regions.

The Hong Kong Monetary Authority (HKMA) oversees the issuance process and ensures that issuers comply with all applicable laws and regulations.

This provides investors with greater assurance when investing in these instruments as well as protection against potential default risk.


Dim Sum Bonds vs. Panda Bonds – What’s the Difference?

Dim sum and panda bonds are two types of Chinese bonds that investors may want to consider when looking for a way to get involved in Chinese markets.

Dim sum bonds are issued in Hong Kong by companies registered outside of China, usually from other parts of Asia or Europe.

These bonds often have higher yields than onshore bonds. Panda bonds, on the other hand, are issued inside China by both foreign and domestic companies.

While both types of bonds offer investors access to a wide variety of investments, it is important to note that panda bonds carry additional risks because they are subject to government regulations.

Some investors may not be able to access them due to China’s capital controls.

On the other hand, while dim sum bonds may have higher returns due to their unique features, they can be affected by currency fluctuations.

So, unlike a bond denominated in domestic currency, where there’s the yield component and capital gains/losses component, dim sum bonds have those plus the element of currency fluctuations.

Traders/investors must do their own diligence when deciding which type of bond is best suited for their investment goals and risk tolerance level.


RMB Financing: Dim Sum vs. Panda Bonds


How to Consider if Dim Sum Bonds Are Right for You

When considering investing in dim sum bonds, traders/investors should ask questions such as:

  • What is the nature of the issuer and its creditworthiness?
  • What is the short and long-term outlook for the bond’s rate of return?
  • What kind of currency risk is associated with the bond?
  • How liquid is the bond and what are the redemption policies?
  • What fees and taxes are associated with holding or trading a dim sum bond?
  • Finally, how does this type of bond compare to other investment options available to traders/investors?

By taking these questions into account, traders and investors can make more informed decisions about whether a dim sum bond could fit into their asset allocation approach.