Should investors tap the dim sum bond market?

ON BONDS

Over the past three years, China has made tremendous efforts to internationalise the renminbi. Trade in renminbi (RMB) has increased, the so-called dim sum bond market has developed and some central banks have started to include the renminbi as part of their reserve assets.

These internationalisation efforts are part of the government’s most recent five-year plan, launched in 2010, and offer investors access to an attractive new market. Looking ahead, three questions remain to be answered. Firstly, by how much is the renminbi still undervalued? Secondly, will China allow the renminbi to appreciate further? And finally, what are the downside risks? We estimate the undervaluation to be between 10% and 15%. That leads to the second question: As the market is expecting and pushing for a stronger RMB, we believe China will allow a slight appreciation. Besi...