Why and how to invest in Dim Sum Bonds

Every Saturday, a different investment opportunity. This week: Dim Sum Bonds.

Imagine a vagrant area in a bad part of town, and then transplant that under one of the more impressive buildings in Hong Kong.

This week I was in Hong Kong, and one of my most important meetings was with a private banker to discuss investment opportunities.

As I walked into the formidable building which housed one of the biggest banks in the world, the bottom 3 floors of the building were missing – raised up on enormous concrete pillars to make room for something out of place: tents and homeless clearly living long term below the impressive 50+ story building.

My native Hong Kongese friend informed me that it was a ‘public space’ and that although the bank had the rights to the airspace above them, the area below the bank could be used by the homeless people living in the space.

Rich above the Poor – Literally

I found it only slightly ironic that the richest people in Hong Kong bankers worked directly above the poorest. Many places are like that in China – with the ultra powerful living alongside the powerless.

After exchanging my id card for a visitors pass, I took the elevator up several floors, and then an escalator to another secure area, finally making my way to a meeting room in the private banking sector.

From the beginning, the banker was friendly but continually made it clear they could not accept US clients. He was quite kind about it, almost apologetic. After assuring him I had many clients from all over the world, we discussed Dim Sum Corporate Bonds.

Dim Sum corporate bonds

Dim sum is a traditional meal in China where the table shares all of the food in the middle, which is brought in small portions. It’s a popular and traditional meal with the opportunity to sample assorted Chinese food. There are fishes, porks, chicken and noodles served with rice and Dumplings, soups and more. If you go to a Chinese Dim Sum meal, you will get to experience true Chinese food – not a cheap imitation knockoff that is the pork fried rice sold around the world.

These bonds are aptly named “dim sum bonds” because you get a taste of the Real China because the bonds are denominated in Chinese Renminbi.

Mostly these bonds are sold out of Hong Kong – but are gaining popularity in other places, including London – where Banco De Brasil recently listed dim sum bonds. (source)

Growing quickly in popularity in the last few years, dim sum bonds are designed as a workaround to Chinese capital controls. They represent one of only a few ways investors can gain exposure to Chinese currency, investment, or debt markets.

The corporate bonds I viewed had quite impressive ROI, upwards of 10-15% with a 3-5 year deposit.

• Powerlong Real Estate Holdings Ltd. – CNY 11.5% coupon with a 3/7/2014 maturity. Real return p.a. of 18.06%
• Shui On Development Holdings Ltd. — CNY 7.65% coupon with 1/26/2015 maturity. Real return p.a. of 7.26%
• Evergrande Real Estate Group Ltd — CNY 9.25% coupon with 1/19/2016 maturity. Real return p.a. of 15.26%

Obviously, these are higher risk, high return investments. This was fairly typical of the coupons offered, and they had many of them. Overall, I wasn’t ecstatic about any of the offerings, because China is headed for a slowdown, particularly in the real estate sector. However, they do represent an exciting chance for one to diversify internationally and also earn a great return on investment.

No Americans Allowed

This meeting was with a private banker, and like many private banking arrangements, Americans are not invited. From an international perspective: bankers hate Americans. They are difficult to deal with, and their government has made it difficult or impossible to remain compliant with the spiderweb of laws and regulations. Most financial advisers would rather avoid them entirely.

West –> East

Dim Sum bonds show the demand for alternative currency in finance, and demonstrate the continued rise of the RMB as a global financing instrument, and show yet another sign of the shift of power from west to east. More importantly, it demonstrates the urgency to diversify your sovereign risk and get your savings internationalized.

On another note, it is possible for one to get residency and a Hong Kong passport if you invest several million Hong Kong dollars into blue chip stocks on the Hong Kong Stock Exchange. This is an approved government program. More on this later. Have a great weekend.