Currency funds: Should you tuck into ‘dim sum bonds’?

How many investments rise in both good times and bad? China’s currency, the yuan renminbi, “can be seen as a safe haven, which should rise in both favourable and unfavourable” markets, reckons Dariusz Kowalczyk at Crédit Agricole. Why?

Because although the Chinese economy is slowing, it’s still set to do better than most of the rest of the world. That would normally push up the yuan. Although China won’t want to see the yuan rise too quickly, and so price its exporters out of world markets, it also can’t really afford to let it fall.

For a start, this would annoy the Americans, who are again making threatening noises about branding China a ‘currency manipulator’ and imposing trade sanctions. But it would also push up the cost of commodity imports. With consumer price inflation now at 6.2%, the highest in almost three years, that’s the last thing China needs. As “the Chinese clearly aren’t going to hike interest rates, the only other weapon they have is the [rising] yuan”, says Leong Sook Mei at Bank of Tokyo Mitsubishi UFJ.

So should you pile into a currency fund? Maybe not right away. With the Chinese economy slowing, it’s possible that the yuan may not rise as far or as fast as some hope – and if China has a hard landing, it may not rise at all.

But there’s another way to pep up your potential profits. ‘Dim sum’ bonds are denominated in the renminbi and issued in Hong Kong. Most issuers are from China or Hong Kong, but international companies are getting in on the act. Fast food giant McDonald’s was the first US firm to issue a dim sum bond last summer, and Unilever and Tesco have since joined in.

As investors have scaled back their hopes for a big leap in the yuan in the near future, dim sum bond yields have risen (ie, prices have dropped) to attract buyers. Average yields have risen to 3.65% from February’s record-low of 1.91%, according to Chinabond, China’s central bond despository. That puts them in line with three-year government bond yields. The sell-off is “a good opportunity to buy high-grade issues”, says Andy Ji at Commonwealth Bank. Invesco has just launched the PowerShares Chinese Yuan Dim Sum Bond Portfolio (NYSEArca: DSUM) exchange-traded fund, which holds 21 securities with an average maturity of 3.3 years and a 3% coupon. The expense ratio is 0.45%. The fund also holds some non-investment-grade bonds, so it’s not without risk. But if you’re looking for a way to play the yuan, it at least offers a decent yield while you wait.

Category: Economics