Demand for Dim Sum bonds under threat, says Fitch

Growth in issuance of Dim Sum bonds is expected to tail off this year even as investor demand increases, says Fitch Ratings.

China’s continued growth, along with the uncertain environment generated by the sovereign debt crisis, has continued to fuel demand for exposure to the Chinese yuan.

The agency says that while the offshore CNH market in Hong Kong is the only means most investors have of gaining this exposure, it is rife with protection and transparency issues.

Fitch has speculated on the lack of independent credit ratings the majority of corporate issuers of offshore yuan bonds hold and the drag on demand that this is said to induce.

“While an independent credit rating may help allay some investor concerns, out of the 39 Chinese corporates which issued Dim Sum bonds in 2011, only seven had an international rating. Baosteel is the only Chinese corporate with an international rating to issue Dim Sum bonds this year,” according to Fitch.

A lack of cross-default clauses, negative pledges preventing the use of assets for debt obligations, and restrictions on future borrowings, are all highlighted by Fitch as points of concern which are typically absent from US dollar high-yield bonds.

Available maturities are also said to be a problem for investors, according to Fitch: “Another key hurdle holding back many international investors from the Dim Sum bond market is the absence of maturities longer than three years (only 9% in 2011, and 3% so far in 2012).

“Notable exceptions include a 15-year issuance by China Development Bank Corporation in January 2012, and a 10-year issuance by the Chinese Government in August 2011.”

It adds: “More frequent issues of long-term Dim Sum debt by the Chinese government and its quasi-sovereign agencies, such as policy banks, would help establish a deeper yield curve that can be used as a benchmark to price other CNH issues.”

The market for Dim Sum bonds grew from ¥40 billion (£300m) in 2010 to ¥174 billion in 2011 while the number of issuers grew from 20 to 100.