"Investors look beyond their home market as they like the additional yield available in Hong Kong, which could range from 15-35 basis points compared to the same onshore bond with similar maturity," said Bruce Zhang, a fixed income portfolio manager at CSOP Asset Management.
An offshore 5-year yuan government bond yields around 3%, versus 2.7% for its onshore counterpart.
For instance, China Minsheng Banking Corporation's Hong Kong branch priced a 2 billion yuan ($290 million) two-year green bond at a yield of 3.15% in January, well below its initial guidance of around 3.6%.
Hong Kong is China's largest offshore yuan hub and saw record issuance of $44 billion of dim sum bonds in 2022, as Chinese investors took advantage of a cross-border trading link called Bond Connect, launched in September 2021, which allows banks and fund managers to access bonds trading in Hong Kong "The Bond Connect has channelled in more mainland Chinese bank investors to the dim sum bond market, before which some of them were unable to access this market," said David Yim, head of capital markets for Greater China and North Asia at Standard Chartered Bank.
As of January, onshore investors held 361 billion yuan ($52.29 billion) of dim sum bonds through the Bond Connect, up from just 6 billion yuan in January 2022, data from Shanghai Clearing House shows.
Dim sum bonds have higher yields partly because issuers have to pay up to compensate for less active trading offshore, said Xue Jiadi, a fixed income portfolio manager at China Asset Management (Hong Kong). Higher interest rates in the U.S. also affect dim sum yields, he said.
"But as liquidity of the offshore market improves, the yield gap between the offshore and onshore market should narrow," said Xue.
Of the top 25 dim sum bond deals issued in Hong Kong last year, 21 were China-domiciled issuers comprising either the Chinese government or local governments, or the offshore branches of China-based banks, data from Refinitiv shows.
Despite its small size compared to the vast $21 trillion
onshore market, the growth of Hong Kong's 643.3 billion yuan
dim sum bond market has come at a time when Beijing's goal to
expand the use of its currency globally faces headwinds.
It has also helped to bolster yuan liquidity in Hong Kong after weak external trade slowed cross-border payments and shrank yuan deposits in the city. ($1 = 6.9039 Chinese yuan renminbi) (Reporting by Georgina Lee; Editing by Vidya Ranganathan and Kim Coghill)
