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DIM SUM BOND -THE EXPANSION OF SINO OUTWARD FOREIGN INVESTMENTS FOR THE
INTERNATIONALIZATION OF REMNIMBI
By Sumi Allen for International Finance
February 19th
, 2015
MACROECONOMIC SCENARIO – CHINA’S AGENDA.
China has expressed interest in using the Remnimbi as a reserve currency or the “Anchor Currency”. The U.S. is trapped
in a Triffin Paradox to retain itself as the reserve currency with twin deficits for the benefit of China. The U.S. sells
Treasuries to Foreign governments in order to be in debt to the world to make the U.S. Dollar available throughout the
world.
China on the other hand has hoarded foreign currencies in order to keep the Remnimbi down, despite the fact that their
trade surplus grew last year. I personally strongly believe that China wouldn’t risk their sovereignty to a foreign power to
gain their objective. Due to the trilemma of international finance, China has exercised monetary independanced and
previously a fixed value of currency which restricted the movement of capital. In the quest for a reserve currency, China
met market demand for loans and exported financial vehicles and RMB denominated currency hubs.
The conservative government of China is slowly releasing controls to create more flexibility in their markets to facilitate a
more active market for debt and trade as an incentive motive to get the Remnimbi made available throughout the world.
The Yuan(CNY) is a subunit of the Remnimbi and the offshore Rimnimbi (CNH) is how Chinese investment and financial
vehicles are traded and settled. Hong Kong is a Special Administrative Region of China which obliges to their own
governance and currency, the Hong Kong Dollar. The Hong Kong Dollar is backed by the U.S. Federal Reserve and
remains pegged to the U.S. dollar. It trades within a band to the U.S. dollar. The HKD is capped at 7.75% gain and
limiting the currency’s decline to 7.85% against the U.S. Dollar. (Li, 2014)
Before the internationalizing of the RMB, Investing in China has been a privilege exclusive to the citizens of mainland
China. China started out in 2003 by establishing a Qualified Foreign Institutional Investor (QFII) program or RQFII
Remnimbi Qualified Foreign Institutional Investor to allow access to shares on the mainland with Yuan held outside of the
mainland. (Betty Liu and Thomas Harr, 2013) (Fion Li and James Regan, 2014)
International trade settlement encourages use of the RMB which increases the demand for Dim Sum bonds. (Cheung,
2014) The RMB outflow is used in cross border trade, offshore consumption by PRC residents, currency swaps, RMB
cross-border trade settlements, RMB settlements of outbound direct investments and the listing of foreign companies in
China. China has done so with a preference for keeping the currency onshore as elaborated with their flow back policies.
Now liquidity and regulations permitting, investments in domestic and multilateral corporations onshore are accessible to
international investors.
Since 2007, Issuers in Hong Kong initiated the market Dim Sum Bonds. Dim Sum bonds are offshore investments in
Remnimbi s to finance companies foreign to China that market their goods in China. The international community can
speculate on currency valuation but it’s not much use for locals due to the low yields and short term maturities (Citi Fixed
Income Indices, 2015), especially if other financial vehicles like equities have a stronger performance.
The first American companies to use a Dim Sum bond for funding were McDonalds, Caterpillar and Hopewell Highway
Infrastructure. They are issued outside of China in Remnimbi is, not subject to approval by the Chinese regulators like
Panda bonds are, they are cheaper than Panda, they have a short maturity, solid credit rating, lower Rate of Return, lower
liquidity, shorter than 3-5 years per HBSC. 90% came from Hong Kong and Chinese Issues. (Cheung, 2014) PAGE 8-10
The onshore corporate bonds are known as “Panda Bonds” which hold tighter restrictions because they have to deal with
the Chinese authorities. Panda bonds have a longer term to maturity and higher yields than the Dim Sum bond. Mercedes
Daimler Chrysler is one of the first multinational companies foreign to China who borrowed with a Panda bond. In this
paper, due to length constrictions I will focus on the Dim Sum Bond as a vehicle of the expansion of the RMB.
Dim Sum Bonds are issued in two different forms, the retail bonds settled in RMB or Eurobonds. The retail bonds since
2007 have been sold by bank issuers from the PRC with offices in Hong Kong. The RMB proceeds are taken back into
mainland China. Baosteel Group Corporation is the first company to get approval to issue retail bonds in Hong Kong.

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Eurobonds are bonds where principle and interest payments are made in currency in which the bond is denominated.
The other types of Dim Sum Bonds are the Synthetic Bonds which are settled in the currencies that they are traded.
Synthetic issuers are allowed to make payments in currencies other than the RMB.
Dim Sums are classified as an alternative investment opportunity for investors who want to diversify their holdings and to
bet on RMB appreciation. (Norton Rose Fulbright, 2012)
HEDGING
The bonds are used in place of forward currency contracts for hedging. They are preferred by foreigners over domestic
investors with accessibility as the bonds are sold offshore instead of mainland where the restrictions are tighter. The bonds
are flexible as they mature in 1-3 years and are easily accessible to investors who would ride them as a carry trade
investment, or use them to diversify their portfolios with international holdings.
The lender or the investor has many more options to purchase a Dim Sum bond. These are short term low yield bonds
which will have a high degree of safety due to the high credit and good history requirements of the issuers with access to
China’s unlimited market demand.
The translation and transaction exposures will provide the investor with the most risk while the operational exposure will
pose some risk to the borrower, or the company of these bonds. The issuers are often held up to high standard investment
rating, requiring a stable good credit history with the intention of making profits from mainland China. The risk of default
from investment grade Dim Sum bonds itself is very low.
The yields on Corporate Bonds in China have fallen to the levels below June 2013 when China’s government cracked
down on the shadow banking industry. The AAA to AA yields are roughly 200 basis points lower in than the start of 2014
and could drop with the further decline as the currency drops further in value.
In addition to the increase on equities volume after the crackdown in Macau, a lower currency value and interest rate could
further increase the trading volume in a booming equities market instead of a bond market, since the incentive motive for
the corporate bonds low yield are in currency appreciation. Domestic investors in Remnimbi Dim Sum and Panda bonds
have the least incentive to do so because they don’t benefit from the carry trade. (Leslie Shaffer, 2014)
This heightened activity on the stock exchanges will result in an increased cost of capital (decreased debts/equity) which is
undesirable for the issuer unless the issuer is a multinational with access to bonds in their home country to push up the
percentage of debt/equity ratio. The multinationals again should have internal controls with multilateral netting and
financial instruments to hedge against the translational and operational exposures. The multinationals from the U.S. are
required by these banks to have a strong enough credit history and access to China’s unlimited demand to retain at least a
stable enough profit in order to not default.
The Efficient Market Theorists believes that the currency exchange fluctuation will already be locked into the price of the
investment and will probably feel very little need to hedge a Dim Sum bond position since the performance of investment
grade major multinational corporations that issues these bonds are typically a very safe place to hold money without any
other factors considered.
TAXATION
Bond issues are structured so that the issuer isn’t subject to deduction on domestic withholding taxes on interest and
principle payments. The PRC Enterprise Income Tax Law and the PRC Individual Income Tax Law and implementation
rules, an income tax is levied on payment of interest in respect of debt securities, including bonds sold by enterprises
established within mainland China to non-residential enterprises (including Hong Kong enterprises). Non-resident
individuals. resulting in an obligation on the issuer to withhold up to 10% on all interest payments. The issuer is required
to “gross up” payments so that bondholders receive the full amount. Issuers have issued RMB Bonds through offshore
issuers guaranteed by PRC Parent company where the issuer group has sufficient non-PRC source revenues to service
coupon payments thereby falling outside the withholding requirements. (Christopher W. McFadzean, David Richardson,
2013)i
“For domestic investors, interest income from non-government bonds is subject to 25% corporate income tax, and capital
gains are subject to an additional 5% business tax (i.e., 30% in total). China is yet to introduce a complete tax system for

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non-local investors such as QFII. It is generally guided that either 10% or a lower treaty rate (in accordance with double-
tax treaties between China and individual countries) be applied for non-government bonds.” (Betty Liu and Thomas Harr,
2013)
Other factors involved with the internationalization of Remnimbi is the Shanghai Free Trading Zone and Shanghai Hong
Kong Connect. The Shanghai Free Trading Zone is a testing area for new regulations and policies in the Chinese market
place. The Shang hai Hong Kong Connect launched in November 2014 allowed cross border trading of select equities
listed on both exchanges. The daily turnover grew to 5.6 billion Remnimbi and 929 million Hong Kong Dollars per day,
(Paolo Danese, 2015) which increases trading volume for investment vehicles both in China and in Hong Kong.
The investor should consult a qualified CPA or tax accountant with expertise insight on the matter with regards to their
portfolios.
INTEREST RATES, LIQUIDITY, FINANCING COSTS, CHINA’S MANAGED FLOATING RATE AND THEIR
IMPLICATIONS ON DEMAND FOR OFFSHORE INVESTMENT VEHICLES.
INTEREST RATES
Unlike other markets, the RMB Dim Sum and affiliated vehicles perform almost directly more by regulation, currency
fluctuations rather than the basic fundamental performance of the companies. Because of the low risk of the issuer
coupled with the low yield, the major influence on performance and marketability of these bonds come from currency
fluctuations which are affected primarily by actions of the Central Chinese banks before the free markets. China has used
interest rate fluctuations as a post hoc regulation measure to enforce either liquidity requirements or to discourage “hot
money” behavior.
As far as the fundamentals of economics are concerned, the Balance of Payments figure is a strong indicator in deciding
how the currency will be valued. The Balance of Payments figure is the sum of the current account balance, the Capital
Account Balance, The Financial Account Balance and the Reserve Balance.
China’s currency will probably need to rise in value because of basic demand for the Remnimbi and the increase of trade
surplus from decreased imports into China. China benefits from twin surpluses as a result of fiscal and trade surplus from
the U.S. The reserve of foreign exchange is high as the government bought quite a bit of U.S. Treasuries in hopes of
somewhat pegging the Yuan to the decline of the U.S. Dollar. However, the only way they can keep the Yuan weaker is to
sell Government bonds to domestic investors who don’t have the financial incentive to buy. Or China can use their money
to invest in invest in businesses and fixed assets abroad.
China’s interest rates are placed through agendas from their government and not necessarily as a result of a free float. The
availability of capital is known as liquidity and the banks liquidity is comprehensively affected by rates and regulations. In
the end, the availability influenced by many factors can affect rates unless the central authorities become involved. More
liquidity can result in higher equity trading, which raises the equity to debt ratio and increases the cost of capital to the
issuer of a corporate bond. When the rates remain high, this indicates a contraction in the economy and investors would
buy a bond instead of equities for more safety against risk and a carry trade incentive if the investor is buying up a bond
from a country other than the where the bond was issued in.
China’s rates may not be counted in LIBOR, but instead the Shanghai Interbank Offer Rate or SHIBOR for short.
On June 20th
, the SHIBOR (Shanghai interbank offered rate) spiked up and drained liquidity. The ad hoc crash crunch
happened when China’s central bank sold 3 month bills on June 18th
, 2013 as deposits were drained by customers
withdrawing money and companies paying taxes before the dragon boat holiday. This sudden crash dried up liquidity but
it sent a message to citizens that the central bank isn’t there to help everytime the banks make too many loans. The
comment is that the regulators should’ve prevented this instead of use of monetary policy. (The Economist, 2013)
The volatility, or the risk of “hot money” speculation of Remnimbi is a concern to the authorities in China and they have
used monetary policy to discourage reckless speculation and the like. The bonds are used to gain exposure to a more freely
floating Yuan against the U.S. Dollar instead of a forward currency contract to offset volatility (LLC, 2014). Also used to
prevent volatility is restrained by a cap on currency transactions in the Hong Kong Shanghai connect.
Asians are often very active on the markets that “hot money” will not always come from foreign sources, but from
domestic pools of investors. The domestic investors are already discouraged from speculating fixed assets because of the
low yields itself muffled out much investor demand from the mainland.

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The regulations are still being written to adapt to the ongoing developing markets.
Monetary policy will only do so much to manipulate market behavior. Other factors would include market trends, fiscal
policies, a change in regulations, politics, and so forth.
People’s Bank of China Governor Zhou Xiaochuan engineered a decline in the currency in the first four months of 2014,
seeking to discourage the flow of hot money taking advantage of the nation’s higher fixed-income returns. The latest bout
of weakness reflects currency traders’ concerns over a slowing economy. The central bank has basically withdrawn from
regular intervention, Deputy Governor Hu Xiaolian said in November. (Fion Li, 2015)
So along with the crackdown in Macau and the linking between Shanghai and Hong Kong Exchanges, the stock market in
China enjoyed a nice spike in volume as a desired or undesired result from Xiaochuan’s decline in the currency. (S.R. |
SHANGHAI, 2014)
Monetary policy is often used to manipulate market behavior but it may not always have the results that the authorities
were hoping for. A robust bond market may provide a stable environment that conservative Chinese may feel comfortable
with instead of a volatile exchange. Yet the stock markets may remain active if the rates were to go back up.
Another regulation to muffle out hot money market manipulation is a rule where cross-border RMB foreign direct
investment into China must not be used to invest in securities or financial derivative products or to arrange entrustment
loans. (Norton Rose Fulbright, 2012)
In any large population, the very factor in creating legislation is consistency. The beginning of China’s venture to finance
world growth to establish its RMB dominance will be a rocky one. Being that spread out, consistency in regulation across
the board, in law and enforcement- will leave less room for misinterpretation and confusion. More effective means to
control market behavior is to implement legislative policies to split up conflicts of interest parties and other specifics to
both investors and borrowers. The requirements are created on an improvised, ad lib process to adapt and adjust to the
growth of these markets.
LIQUIDITY
Liquidity is a main focus in the rapid expansion of China’s offshore funding agenda, and the liquidity concerns with the
RMB denominated offshore banks are a consequence of the Subprime Collapse and credit crunch which led to international
market disruption a few years ago.
The initial main liquidity funding source historically has been China’s volatile money market rates, the trendy savings rate
and the 75% cap on loan to deposit ratio restriction. This caused banks to be heavily dependent on customer deposits and
money market rate stability will positively affect funding costs through demand.
Per Moodys, the RMB in Hong Kong since 2004 has grown to 275 RMB billion in 2011, which is a mix of savings and
fixed deposits in the banks. (Dominique Gribot-Carroz, Ivan Chung, Paul Ulrich and Wing Chan, 2011)
The Chinese Government Bonds (CGB) returns a low yield, but the buyer of these bonds will not be subject to taxation in
China.
An alternative liquidity funding source become available by banks issuing CNH denominated instruments directly by
swapping from U.S. Dollar or Hong Kong Dollar denominated bonds or CD’s to CNH. The U.S. Mark to Market
requirements deter Chinese banks from engaging in a swap for the U.S. dollar. (Betty Liu and Thomas Harr, 2013)
Regulation can increase liquidity for banks issuing financial instruments in RMB. An example is by increasing increasing
the cap to $80,000 on how much Remnimbi local residents can buy in a day $80,000. Until November 2014, they were
only able to convert up to Rmb$20,000/day (U.S. $3265) in or out of the currency. (Josh Noble, 2014)
The demand for Dim Sum bonds grew from the 10 billion RMB issuance to 41 in 2010, the rapid growth has led to
oversubscription and the supply failed to keep up. (Dominique Gribot-Carroz, Ivan Chung, Paul Ulrich and Wing Chan,
2011)
Capital outflows are another drop in liquidity. If the liquidity in China drops too low, the central monetary authorities may
get involved or, the Chinese may have to raise interest rates.

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The monetary policy tools include the Open Market Operations (OMO), Policy benchmark lending and deposit rates,
required reserve ratio, rediscounting and central bank lending. The benchmark interest rates are influenced by repo fixing
rates and the “Shanghai Interbank Offered Rate (SHIBOR).
Other basic aspects affecting offshore RMB liquidity growth are appreciation expectations, new or the widening of
channels for RMB cross border flows, China’s credit cycle, a lack of great CNH products increases liquidity and global
monetary and rates. (Staff Writer, 2013)
The popularity of Dim Sum bonds gained steam in recent years until the RMB declined in value this past year with the rise
of the Rimnimbi.
IMPLICATIONS OF INTEREST RATES AND DIM SUM BOND YIELDS
China’s economy will keep growing despite their forecasts of doom and gloom, they may not grow as fast. The issue on
valuation of the Dim Sum and Panda bonds weigh heavily on the valuation of the Remnimbi vs. U.S. Dollar because the
interest rate differentials are measured by the carry trade and not the performance of the bond itself. The markets
anticipate unfavorably a rise in interest rate from the Federal Reserve in the near future.
Money managers have been calling the issuers for higher yields to compensate for the downward pressure of the Yuan.
The yields may go up from the demand from borrowers (Multinationals seeking Dim Sum bonds to finance their expansion
into China). (Fion Li, 2015)
The China Offshore Sovereign curve contracts and the interest rate differential between this and the U.S. Treasury yield
curve narrows.
The People’s Bank of China’s interest rate is currently at 5.6%. With nothing else considered, they reported inflation of
.8%, which is below their 1% expectation which is another sign that they’re going to cut the interest rates further to prop up
the market with further liquidity.
As of now, the interest rate differential between China’s interest rate and that of the Federal Reserve is 5.55(the difference
between China’s rate of 5.67- and the Federal Reserve rate of.12). (Global Rates) (Federal Reserve , 2015)
It should be noted that stocks move in the opposite direction of the bonds and although the Shanghai and Hong Kong
markets are now linked, one will need more access to the stocks financed by the companies. Lucky for the U.S. investor
that the multinational enterprises which are funded by Dim Sum Bond stocks ARE located on the U.S. exchanges (ie.
McDonalds, Catapilar, etc.). The U.S. Citizen can invest on the U.S. exchanges without acquiring a Visa or a QFII.
RMB BEYOND CHINA’S BORDERS
INTERNATIONAL REMNIMBI CURRENCY HUBS
Chian has implemented offshore clearing banks which enables greater usage of currency in cross border settlements and
develop a range of Yuan based financial services and issue the Dim Sum Bonds. The Hong Kong Monetary Authority
channels immediate liquidity (itnra-day, overnight and next day) to seven banks. These banks are located in London,
Frankfurt, Paris, Seoul, Luxembourg, Doha Toronto and Sydney. (Matt Jamieson and Sabine Bauer, 2015)
The expansion of RMB hub and Chian’s bank offshore branches provide offshore lending activities, including overseas
direct investment, export credit, letters of credit, and other means to facilitate trade.
As I mentioned before, San Francisco put in a bid against Toronto as a trading hub in North America and Toronto won that
bid. Australia (JOHN WEAVERS, DANIEL STANTON AND SPENCER ANDERSON, 2015)and Sri Lanka (James
Crabtree, 2014) are setting up Remnimbi hubs to facilitate transactions more efficiently with China as their trade partner.
CURRENCY THOUGHTS
If China’s Remnimbi loses value compared to the U.S. Dollar, the U.S. could take advantage of it by cutting any
restrictions to international investments then cut capital gains tax so investors can borrow from low interest rate countries
and work a carry trade incentive to add much needed live, human organic volume on the U.S. exchanges.

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The US stock exchange is propped up by algorithmic high frequency trading platforms to compensate for the dead volume
on the U.S. exchanges. Chinese volume would totally provide much needed volume, and attracting international investors
to take advantage of the volume in China.
BID FOR RMB HUB IN SAN FRANCISCO
Back in May, San Francisco put in a bid to be the first offshore hub for the U.S. San Francisco hasn’t been noted as a
currency hub, but with the large Chinese American population and opportunity costs in mutual beneficial arrangements;
Mayor Lee of San Francisco with Govenor of California Jerry Brown teamed up and tried to compete with Toronto to
make San Francisco the first offshore Yuan hub in North America (Toronto beat San Francisco to it). (Steven Yang and
John Liu, 2013)
Jerry Brown encouraged investments from China into California. The investments from China to the U.S. since 2005 went
up to $77 billion, with $68 billion allocated to the bullet train. This figure is projected to triple in size by 2020. (Rory
Carroll, 2013)
CLOSING
The objective of China’s government to establish a reserve currency is feasible. The IMF will review it’s basket of
currencies for the last 5 years backing it’s Special Drawing Rights facility may add the Remnimbi. The other factors look
pretty good as the Chinese economy is large and established enough. (Paolo Danese, 2015)
The popular misunderstanding of works done by John Maynard Keynes would blame monetary policy for the woes in the
U.S. John Maynard Keynes wrote a very thorough comprehensive dialogue regarding how investments should be
concentrated in the country with a trade deficit. (Keynes, 1935)
Monetary Policy is not the only or the sole means to influence economic trends. During big trends, the effect of Monetary
policy is marginal, as the 5% Federal Reserve Interest rate during the Dot Com bubble.
As history revealed during the 1980’s, tax breaks encouraged the wealthy to bring their money back into the United States.
When this money was within U.S> borders, the wealthy had nothing better to do with it so they invested it. The result of
this investment was the spike in civilian to population Employment Rate, an indicator of a very healthy economy despite
both trade and fiscal deficits in the U.S. at that time.
The U.S. ranked 143 out of 158 countries for private sector investments per GDP. (CIA World Factbook, 2014)
This grabbed my attention when I was placing trades for T.D. Waterhouse. In 2003 when the market was dropping, I
received a large trade order (50 trades) in one call from a Chinese American Power of Attorney for 15 different accounts
and they were all buy orders
Until 2004, China had not created or sold any financial vehicles offshore. And China gained the investor market before the
U.S. got in. China has refused to remove barriers to the U.S. Financial sector between the U.S. and China in 1995, just
three years after Maurice Greenberg of AIG did well selling insurance in China. The cash flow into the U.S. comes
primarily from the sale of U.S. Treasurys to foreign governments and the Federal Reserve, not from exports or private
sector backed investments. Between then and now, barriers restricted the flow of loans between borders for non-
governmental institution and created a havoc of opportunity costs and economic health for the U.S.
As a consequence of current events including the 9/11 attacks and the subprime collapse, the volume on the U.S. stock
exchanges are anemic. Seventy percent of the markets’ volume in the U.S. is made up of algorithmic trades, (Carol L.
Clark, Financial Markets Group, Chicago Federal Reserve Bank, 2010)
The U.S. needed to physically pick up and move 99 Wall Street and stick it smack right in the middle of Macau, then stick
the ticker tape on the slot machines. Then cut capital gain taxes altogether to revive human volume on our exchanges and
in other vehicles.
While the offshore bond market was being developed, EB-5 Greencard incentive motive had some issues and investors
who are Greencard hopefuls have been able to participate by investing in mostly real estate. Some had issues with the beef
sector thanks to Joop Bollen in South Dakota while others were waiting for approval of oil investments in the U.S.

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To elaborate on the lopsided allocation of investment vehicles between the two nations; only seven stocks which are traded
on China’s exchange are as follows: Dell, Microsoft, Amgen, Cisco, Intel, Applied Materials, and Starbucks. Many more
Chinese stocks are listed on the U.S. exchanges.
Singapore Exchange lists SPDR Gold Shares and SPDR S&P 500 ETF TRUST from the U.S. on their exchange.
China beat the U.S. to it, China cracked down on gambling in Macau casinos so the previous gamblers started to buy stocks
instead. Coupled with a weaker Remnimbi value and cheaper margins, the Chinese stock market is gaining steam.
Asians are savers and investors even moreso than consumers. And as the saying goes, the merchant needs to market to
where the money is at.
Investing is not only a huge trend in China; it sides with gambling as a past time for Asia. Asian countries act as an
oligarchy due to competitiveness within the region. When one group does something, it instantaneously becomes a trend
since they stay competitive in order not to lose the market share or suffer the consequences thereof.
China has also expressed concerns about a stagnating economy. China will grow. If infrastructure is not funded by the
government, domestic and foreign money will finance the expansion in the land of limitless demand.
China wants to remain in control of the expansion of China’s trade throughout the world, which may be justified
considering the 1.4 billion citizens they’re responsible for.
China wants to be an anchor currency while the rapid, evolving ad-hoc improvisational regulation of the Remnimbi
availability will need to consider the effectiveness and externalities with regard to interactions throughout the global
markets.
Many vehicles created in these arrangements will create mutual beneficial trade relationships between China and the world.
It is the responsibility of leaders of these countries to enable businesses and citizens to adapt and adjust to the ebb and flow
of these changes.
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