NEW YORK (TheStreet) -- The latest fad in exchange-traded funds is ETFs that own bonds issued in Hong Kong and denominated in renminbi, the Chinese currency.These are known as "dim sum" bonds, after the small plates of food served for breakfast and brunch in southern China. Two funds investing in these bonds were listed last week, and more are in registration. China's importance in the world economy continues to grow, and the special administrative region of Hong Kong is a key financial center. China's bond market is growing, and more and more global companies are issuing debt denominated in renminbi.
The fundamental risk to this scenario lies in China's future growth. There are questions about overcapacity in real estate and the indebtedness of the nation's banks. I have repeatedly warned readers to avoid China's financial sector, because it seems clear that it will experience the growing pains and debt mismanagement that typically accompany rapid development. An investor wanting to participate in China's growth would probably be better off buying the WisdomTree Dreyfus Chinese Yuan Fund ( CYB), which is a simple currency fund, or by buying an individual issue dim sum bond. If you think McDonald's can manage to stay in business then its dim sum bond might be less of a credit risk than some of the Chinese bank debt in the ETFs. At the time of publication, Nusbaum held no positions in securities mentioned.
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