Pass on Dim Sum Bond ETFs

Huge demand for the tiny market of local-currency-denominated Chinese debt means investors aren’t being compensated for the risks they are taking, says Morningstar’s Patty Oey. According to Patty, “Investors should realize that this asset class is still very, very small and relatively very young. The first dim sum bond launched about a couple of years ago, and right now the whole market of total bonds outstanding is only about US$30 billion, which is very small. Other emerging market local currency debt markets are actually much larger, and the whole emerging market local currency market is about $6 trillion. So Chinese dim sum bonds are currently less than 1%. And just to put that in context, if you look at the equity market, the MSCI Emerging Markets Index, China accounts for about 16% of that index. So, their local bond market is still very, very, very small. I also want to highlight, because the asset class is still very small, but demand has been very, very strong, credit spreads are actually very tight, and they’re tighter relative to comparable markets.

And investors should also know the credit risk. Most of the issuers of dim sum bonds have been Chinese banks, and there is definitely a lot of concern about their balance sheets, given their surge in loan growth during 2009 as part of the government stimulus.”

See the full “Morningstar” interview below:


Related ETFs: Guggenheim Yuan Bond ETF (NYSEArca:RMB), WisdomTree Asia Local Debt Fund (NYSEArca:ALD), PowerShares Chinese Yuan Dim Sum (NYSEArca:DSUM), Market Vectors Renminbi Bond ETF (NYSEArca:CHLC)

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