1st November 2010: ‘Dim Sum’ Bonds

The Asian Development Bank‘s release of ‘dim sum’ bonds in Hong Kong illustrates several key processes in financial innovation.

First, understand the circumstances of local markets. As the issuer, the ADB has watched the People’s Bank of China‘s monetary policy and the opportunities to issue yuan-denominated debt. Second, identify potential clients who want to take advantage of the local markets, or cross-border opportunities. The ADB has targeted several client types: (a) overseas firms who need a financing mechanism to expand into China via joint venture or foreign direct investment; and (b) institutional investors who want to hedge, arbitrage or speculate on foreign exchange markets. Third, develop a ‘bespoke’ or tailored financial instrument that enables you as issuer to act as a liquid market-maker for clients, raise the dollar value of assets under management, and that exploits the information asymmetries, inefficiencies, and circumstances of either local markets or inter-market movements.