Given the exponential surge of offshore RMB (CNH) bonds or "dim sum bonds" in the past year, here are some relevant points to note.

While most CNH bonds have been issued as stand-alone bonds, a number of international issuers have also used their shelf euro medium term note (EMTN) programmes to issue CNH bonds.

The latter option is a cost effective one since, for example, in EMTN programmes the relevant CNH bond provisions can be set out by incorporating them in the final terms. While issuing off an EMTN programme is convenient for issuers, it has yet to be seen whether specific RMB provisions will make their way in becoming a common part of the standard documentation package for shelf programmes.

The typical CNH bond related points which are not addressed in existing EMTN programmes include CNH bond specific risk factors and settlement provisions. While the Central Moneymarkets Unit of the Hong Kong Monetary Authority (CMU) has traditionally been used for settling CNH bonds, Euroclear and Clearstream have in recent months introduced a mechanism for clearing and settling CNH bonds, whether such CNH bonds are deposited with a common depositary for Euroclear and Clearstream or with the CMU.

Whilst Asian investors may be less concerned as to whether CNH bonds are cleared through the CMU or Euroclear and Clearstream (although there is generally a preference to include CMU clearing where possible), issuers with existing EMTN programmes will benefit from having such a feature as it considerably reduces the need for changes to the documents for EMTN programmes.

From a practical point of view, the necessary transaction preparation time including those for CNH account opening and for obtaining of the approvals from the Chinese authorities for the remittance of the issue proceeds into the PRC need to be taken into account by issuers when cooking a Dim Sum bond.

In terms of listing, with Volkswagen’s Dim Sum bond, there is now an offshore RMB bond listed on the Luxembourg stock exchange. Other issuers prefer Singapore or Hong Kong listings.

The process of transferring offshore RMB into China is still considerably onerous if not done for trade purposes. Capital account items have been approved by the Chinese authorities in the past on a case by case basis depending on the alignment with policies dictated by Beijing, such as excluding money destined for the Chinese property sector. A number of liberalisation measures are currently being implemented which in time should increase the attractiveness of issuing Dim Sum debt.

Issuers who do not want to invest in or pay for trade with the PRC may also be interested in the offshore RMB bond market. One alternative is synthetic Dim Sum bonds, which are settled in USD. These have been largely used by Chinese property companies in order to address remittance issues. Nevertheless, investors are getting pickier and increasingly start looking into the issuer credit. In addition, synthetic Dim Sum bonds as well as other CNH products suffer from regulatory uncertainty including the mainland Chinese push not to use the ISDA master agreement but its Chinese counterpart for CNH derivatives transactions.

For an emerging markets issuer paying double digit interest rates in its home market, the offshore RMB pool could still prove to be a cheap source of refinancing, even if the proceeds are immediately swapped into USD or Euro. For companies exporting goods to China in the emerging markets of Latin America, Africa or Asia, an offshore RMB bond could have several advantages: the elimination of exchange rate risks together with cost savings, the gains from the RMB upside, the use of payments received in RMB for making principal and interest payments on the CNH bond and "bonus points" with the PBOC, who is actively promoting this idea by concluding RMB swaps with other central banks. For importers of Chinese goods however, the benefits are limited to the first point and they face the danger of RMB appreciation as they normally do not receive any income in RMB which they could use to pay back the CNH debt.

Investors in CNH paper, comprising mainly asset managers from Hong Kong, Singapore and Taiwan, private banking clients and also banks, insurance companies and corporate treasury departments, mainly search for yield or simply to have a place to park their offshore RMB holdings. In order to get exposure to the currency upside investors may also consider investing in one of the incipient RMB funds or CNH indices as an alternative.

We will, thus, see more issuances and the CNH bond market getting more liquid. Currently, rewards for early adopters to the CNH bond market by way of low interest rates still seem available.

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Robert Koller is a Solicitor with Clifford Chance and a Chartered Alternative Investment Analyst.

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Disclaimer: The opinions expressed in “View from the Ground” columns do not necessarily reflect those of the FT Tilt editorial team. FT Tilt may edit the columns for clarity; any errors of fact or omission are the authors’ own.

See also:
FT Tilt's coverage of "dim sum" bonds