After the Samurai bonds and the Kangaroo bonds issued by foreign companies in Japan and Australia, a new breed of the corporate debt instrument is gaining much media attention: the Dim Sum bonds.
Named after a traditional Chinese dish, these Yuan-denominated bonds issued in Hong Kong are a delightful addition to investors menu.
The latest offering worth RMB300 million by Unilever received widespread coverage, as the company is the first European multinational to launch a dim sum bond in Hong Kong.
The dim sum, however, is unique not only because of its appetising name, but also because its overriding attraction is not just the conventional features investors look for in a bond issue. Instead of focussing merely on the yield and coupon rate offered by the bond, investors are also lured by potential gains in the Chinese Yuan by the end of this year.
Josh Noble, Asia editor of the Financial Times Beyondbrics wrote, "Investors who hold a renminbi bond...can count on a further 2 per cent appreciation over the next year just on currency terms."
Priced at 1.15 percent, Unilevers bond issue seems a tad cheap, especially compared to the 2 percent and 3 percent offered by McDonalds and Caterpillar previously. But add to it the possible gains from Yuans appreciation, and the issue would appear prettier at around 3 percent in the case of Unilever.
In fact, the issue would appear rather handsome when the consensus Yuan forecast is accounted for: the Chinese currency is expected to appreciate 4.1 percent, over the next year, according to the economists polled by Bloomberg.
Relative to the deposit rates offered by banks in Hong Kong for Renminbi deposits - hovering around 1 percent - the bond offers become more lucrative for investors.
For the issuer - the foreign companies in case of dim sums - the cost of financing is lessened thanks to the allure of an appreciated Yuan to investors. They also get to market their brand identity subliminally through symbolic gestures in the huge Chinese market, as highlighted in the Financial Times, "Unilever...will hope the move demonstrates its commitment to China."
For authorities in Beijing, vying to evolve the Yuan as the worlds reserve currency, such issues by foreign corporations can help establish a stepping-stone for internationalising the currency.
Yet, many analysts are not as optimistic about the rise of the Yuan, hinting that investors banking on the currency appreciation should prepare themselves for a less-than-pleasing appreciation.
In order to control imported inflation, especially that of rising commodity prices, China had succumbed to allowing the Yuan to rise gradually. "Once China gets a grip on inflation, there could be a reduced need for appreciation," Albert Leung, FX strategist at Citi, warned on FT a few days back.
The lull performance of the Renminbi in the forwards market, which points to a less than 2 percent appreciation over the next twelve months, reiterates this apprehension further.
While the overall atmosphere in emerging markets local currency bond markets - expanded by 13.6 percent to $5.2 trillion in 2010 on the back of growth in corporate bonds - is favourable, it would do well for investors to avoid being blinded by the anticipated Yuan appreciation, and assess their risks and returns for dim sums more carefully.