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Why dim sum’s on the menu

The success of Chinese equities has been well documented because of rapid economic growth and exciting stockmarket potential and, as a result, these stocks have found a home in many a portfolio.

But now a new investment story is emerging from the region. The fledgling offshore renminbi bond assemblage, or so-called dim sum market, burst onto the scene about halfway through last year.

It was at this time the Chinese authorities altered regulations, making it possible for a far greater number of institutions to issue bonds.

Since then, the sector has enjoyed rapid growth, from ¥29bn (£2.89bn) in July 2010, to ¥61bn at the end of the year and ¥210bn as at November.

This is small in terms of the wider picture of the global bond markets, which tallies up to about £60trn. However, the dim sum market presents investors with a potential plethora of investment opportunities as it punches significantly above its weight.

The primary reason that retail investors and their advisers should be interested in this market is that it offers a viable way to gain access to Chinese currency. The growth of the economy has pulled back from the breakneck year-on-year growth before to the economic crisis but it is still widely expected to outperform developed Western economies by a substantial level in the coming years.

China is the world’s biggest exporter and there is no shortage of political lobbying from around the globe to try to convince the authorities to allow the renminbi exchange rate to more accurately reflect China’s huge current account surplus and strong economic fundamentals.

Since 2005, the authorities have allowed a managed appreciation of the currency and we anticipate this will continue in the medium term.

There are no guarantees when it comes to investing but we believe further appreciation of the renminbi against the greenback is highly likely in the medium to long term and investors can now directly access that potential.

The offshore renminbi bond market has appealed to a number of different types of issuers, which we believe is good news for investors as it allows for a greater degree of diversification and rising liquidity. The government there has issued bonds, as have commercial banks, policy banks and corporate institutions.

In addition, the sector has attracted global issuers, keen to get ahead in this sector, which arguably may develop into one of the world’s biggest marketplaces.

Recent issues from Air Liquide in France and BP and Tesco in the UK have highlighted the market’s extensive attraction. Equally, it seems investors realise that if the on and offshore bond markets eventually merge, Chinese bonds will become one of the world’s most important asset classes. As a result, we anticipate that many are determined to make sure they gain exposure as soon as possible.

Geoff Lunt is investment director for Asian currencies at HSBC Global Asset Management

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