11/9/11: A Feast of Dim Sum Bonds

Most people think of dim sum as the Chinese teatime meal that consists of dumplings and other snacks served by waiters pushing steam carts around the dim sum parlor. But for global investors, the term “dim sum” also refers to the offshore Renminbi (RMB) bond market. The currency in which these bonds are denominated is also referred to as Chinese Offshore Yuan (CNH). This fast growing market was established in 2007, but didn’t take off until last year.

Under current rules, the dim sum market allows domestic and foreign companies to issue bonds that are denominated in RMB. The rapid accumulation of RMB deposits in Hong Kong is largely fueling the fast growth of the dim sum market, as investors buy dim sum bonds to earn a better return on their deposits. The dim sum market experienced record issuance during the third quarter, with around USD21.3 billion of new bonds. At present, the total size of the dim sum market is around USD30 billion and growing.

The dim sum market has the full sanction of the Chinese leadership, including Li Keqiang, the vice premier of China’s State Council and the most likely successor to Premier Wen Jiabao. In a recent speech, Mr. Li indicated that plans are being formulated to facilitate onshore investment of RMB funds. Presently, the RMB is not a fully convertible currency, so the dim sum bond market provides greater ease in channeling funds back to the mainland.

The preferred exchange-traded fund (ETF) for exposure to the dim sum market is PowerShares Chinese Yuan Dim Sum Bond Portfolio (NYSE: DSUM). This ETF tracks the Citigroup Dim Sum Bond Index, which includes government as well as private bond issues.

The ETF was launched this past September. It’s still quite small at just $3.6 million in assets, but we expect it to quickly grow in assets. The annual expense ratio is just 0.45 percent. And while the ETF hasn’t yet paid its first distribution, it should yield between 3 percent and 4 percent.

A play on an appreciating currency with an income kicker, PowerShares Chinese Yuan Dim Sum Bond is a buy under 26 in our Short-Term Opportunities Portfolio.

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