The maturing of the Mainland’s capital markets is slowing demand for dim sum bonds.
Whilst Hong Kong is recognised as one of the world’s top financial hubs, it may have to work overtime to maintain its lead as China introduces rapid reforms to its capital markets and may even challenge Hong Kong’s reign over the coming years, according to BMI Research.
Despite greater cooperation in equities with the launch of the Shanghai-Hong Kong and Shenzen-Hong Kong stock connects in 2014 and 2016 respectively, competition is the prevailing theme characterising the relationship of the two with regards to the the issuance of bonds.
The impact of stiffer competition will most likely be felt in Hong Kong’s offshore CNH (dim sum bond) market which were once popular with foreign investors desiring exposure to yuan-denominated assets but were restricted by capital controls to onshore.
“In our view, the prospects for growth in the issuance of dim sum bonds is rather limited over the coming years as the onshore bond market gains prominence,” BMI said.
Efforts by the Chinese government to liberalise its market is also accelerating foreign interest. For instance, the People’s Bank of China stated in 2016 that Qualified Foreign Institutional Investor (QFII) are no longer subject to approval and quota restrictions when investing in China's interbank bond market. Bloomberg has also announced that it will add yuan-denominated government and policy bank securities to the Bloomberg Barclays Global Aggregate Index effective April 2019.
“It is likely that Panda bonds (yuan-denominated bonds that are issued by foreign issuers on the onshore bond market) will continue to threaten dim sum bonds,” as the issuance of panda bonds has exceeded that of dim sum bonds clocking in at CNY132b and CNY71.9b last year from CNY48.1b and CNY20.9b in 2016.
The amount of Panda bonds issued in 2018 was also slightly higher than that of dim sum bonds after coming in at CNY23.2b compared with CNY20.1b as of March.
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