3. The RMB: the Domestic Currency of a Global Actor
3.3. Dim Sum Bonds vs Panda Bonds
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institutional actors to keep buying stocks, helped with Central Bank cash.26 Investors who hold more than 5% of the stocks of a company were forbidden to sell the stocks to avoid another major sell-off. In January 2016, after having forced State-Owned Funds to buy 200 billions of USD of shares in a few months to prevent the prices to fall, the government accused foreign forces to destabilize its market and has arrested close to 200 persons on the basis of “spreading rumors” (a convenient law who allows people saying a different story from the official one to be arrested). The stability-obsessed regime has known its first financial turbulence and reacted firmly to it. Three years after those turbulences, the stock market remains at the same level while most global equity markets have been rising.
3.3. Dim Sum Bonds vs Panda Bonds
Those curious nicknames designates two similar financial products used to raise RMB for foreigners. The first one was the Dim Sum bond, issued in Hong Kong and named after the famous Cantonese dish. The Panda bond is more recent and is issued inside mainland China.
The reason for those two different kind of bonds for the same underlying product (the RMB) is that the Chinese securities market have only been recently opened to foreign investors. As a majority of investors were restricted to invest in Chinese mainland market, issuing those bonds in Hong-Kong allowed Chinese companies to reach more investors who wished to have an exposure on the currency of the fast-growing Chinese economy. The Dim Sum bonds were launched in 2007, and only Chinese and Hong-Kong banks could issue RMB-denominated bonds. In 2010, the market was deregulated and foreign banks could issue Dim Sum bonds as well. The appetite of the investors for those bonds was enormous, and the growth was exceptional At the beginning of the decade, the Dim sum bond market was flourishing due to several factors: The RMB was appreciating against the US dollar, the Treasury Notes interest rate was near-zero while the interest rate in mainland China was at 6.50%. This attracted
26 “Beijing abandons large-scale share purchases” Jamil Anderlini (August 2015), CNBC
DOI:10.6814/THE.NCCU.IMBA.027.2018.F08
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Chinese companies to borrow money at a lower rate by issuing in Hong-Kong to foreign investors that lacked good investment opportunities.27
The Panda bonds appeared later than the Dim Sum bonds, as if the Chinese government wanted to use Hong-Kong as a pioneer for the internationalization of its currency before finally opening its financial market. In the case of a full opening of the inland market, there would be very little interest in holding Dim Sum bonds, while the Panda market would be more liquid with the vast pool of local Chinese investors.
Figure 2: Issuance of Dim Sum Bonds per Year28
The issuance of Dim Sum bonds had decreased in 2015 for three reasons. Firstly, the 2015 market shock affected the trust in the Chinese financial market and stopped the appreciation of the RMB against the dollar, making it a less profitable financial instrument. Secondly, in 2015 China started gradually opening its capital accounts in mainland China meaning it was easier for investors to invest in mainland market through Hong Kong. To make it happen, they reduced
27 ‘Dim sum bonds’ are fueling China’s currency rise, Fion Li (August 2011), The Washington Post
28 “China's Debt Crackdown Helps Revive Flagging Dim Sum Market”, (June 2018) Bloomberg
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paperwork and improved the convertibility of offshore assets into RMB. Thirdly, Chinese investors are still barred from investing large part of their capital in Hong Kong, and the RMB deposit in Hong Kong (called CNH, to differentiate with CNY) have reduced greatly due to loss of confidence in the RMB. This tightened the liquidity of the RMB assets in Hong Kong and made the issuance of RMB bond offshore less attractive. Lastly, the fear of investors speculating against the RMB has led Chinese authorities to forbid short selling in Hong Kong, which tampered the liquidity of the RMB-denominated bonds.29
This decrease in the issuance of Dim Sum bonds has let analyst thinking that it was actually a transitory product before the full opening of the mainland capital market. Especially that in the meantime, the Panda bond issuance soared. However, we can see that as of June 2018, there already had more issuance of Dim Sum bonds than in the whole year of 2017. This would announce a possible revival of the Dim Sum bonds. The reason is that a part of the supply and demand from the Panda bonds has been transferred onto Dim Sum bonds. 30 On the supply side, the Chinese government has been more and more concerned about the high level of debt of its economy, and 13 lower rated bonds issuance have been canceled in the second quarter of 2018, the most in 2 years. Meanwhile the demand for RMB-denominated bonds remains high, and most of the repayments of such bonds is reinvested in new bonds, especially that investment in RMB are profitable compared to investment in other currencies and the yield spread between RMB notes and Treasuries Notes have widened to their biggest point in two years.
29 “China’s Panda-Bond Boom Threatens Dim Sum Market Survival”, (August 2017) Bloomberg
30 “China's Debt Crackdown Helps Revive Flagging Dim Sum Market”, (June 2018) Bloomberg
DOI:10.6814/THE.NCCU.IMBA.027.2018.F08
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