Designed to track the performance of the growing market, the index covers about half of all outstanding debt denominated in the Chinese renminbi (RMB) market in Hong Kong.
It targets corporate, sovereign and quasi-government debt and to qualify for the index, a bond must be denominated in RMB, have at least one year to maturity at the time of issuance, have a fixed coupon schedule and have an outstanding face value of at least RMB500m ($80m).
The offshore market in Hong Kong has sprung to life since the Chinese government decided to allow qualified financial institutions to repatriate offshore renminbi into the domestic market last August.
The Chinese government’s change in policy was, according to Standard Chartered, an “exciting, significant and unexpectedly early step” and meant the birth of a new market.
Before the new rules were passed, banks in Hong Kong could only deposit their renminbi at a designated clearing back, with a very low, stable yield of 0.865%.
But now the path has been paved for the issuance of RMB bonds and the market has nearly tripled in value to RMB103.5bn since the start of the year (as at 31 Oct).
Phil Galdi, head of global bond index research at BoAML, said: “The Dim Sum index gives investors a comprehensive picture of the structure, risk characteristics and performance of this rapidly growing asset class.
“While the capitalisation of the Dim Sum Index is still a long way off, compared with the onshore China bond index, its rapid pace of growth attests to the interest it has attracted as foreign investors remain eager to gain access to China’s bond markets.”
The next expected development is for a broader range of bond issuers to emerge, which BoAML said would help to add depth to what is “a growing and important asset class”.
It added that investors should be aware that Dim Sum bonds can behave very differently from onshore RMB bonds.
The bank has had an onshore index for seven years, but said it was unsuitable to try and draw conclusions about the long term performance potential of the Dim Sum bond index by using it.
For example, for the first eight months of the year the Dim Sum Index and onshore China Bond Index tracked very closely, but subsequently have diverged markedly, with the Dim Sum market underperforming comparable onshore bonds by nearly 6% over September and October.