Appetite growing for dim sum bonds, say experts

The peak of dim sum bonds coincided with investors' concerns over the yuan's further depreciation and possible defaults from Chinese issuers.

The default of onshore debt by Shanghai Chaori Solar Energy and Zhejiang Xingrun Real Estate exposed severe corporate leverage problems, and the situation grew more serious with tightening liquidity by the central bank.

The incidents undermined investors' confidence in high-yield dim sum bonds and pushed up the yields 15 basis points to 4.36 percent on average, according to HSBC's research.

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Frankie Tai, associate director for Asian fixed income and cash portfolios for Invesco, a Hong Kong-based fund, said that these high-profile defaults have negatively affected investors' appetite for risk.

"We have seen new issuances mostly coming from banks and investment grade corporate bonds, rather than high-yield names," he said.

Tai said that a sharp slowdown of the Chinese economy could trigger a large-scale credit default.

"While this is not our worst-case assumption, we do expect there will be more cases of onshore defaults," he said.

Chung of Moody's said that the challenging environment and ongoing economic rebalancing will put more stress on weak Chinese issuers, particularly those in overcapacity industries with considerable debt to refinance.

Standard Chartered Bank expects the demand for dim sum bonds will remain steady in the coming months, with a growing offshore yuan pool in Hong Kong.

Up until the end of March, dim sum bonds and offshore renminbi certificates of deposit reached 692 billion yuan, rising by 24 percent from the end of 2013.

Chung said that for the whole year, issuance volume will continue to grow, with strong demand from policy banks and State banks.

"In the coming months, more new issuers will tap the dim sum bond market, due to continuing tighter credit onshore and lower borrowing costs offshore," said Chung.

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