Reforms pave way for the renminbi

Chinese vice premiere Li Keqiang announced in August a set of reforms that would further advance the internationalisation of the renminbi.

Those reforms are paving the way for the creation of new renminbi-denominated products to feed the demand for access to the mainland economy and its appreciating currency. They are also benefitting Hong Kong because of its enhanced cross-border investment opportunities with the mainland.

The reforms include the go-ahead for the much-anticipated mini-qualified foreign institutional investor (mini-QFII) programme, which is now referred to as the renminbi QFII (RQFII); a mainland exchange-traded fund (ETF) linked to Hong Kong shares; the issuance of renminbi bonds in Hong Kong by mainland companies; and more Chinese Treasury bonds.

Those developments “all point to good times ahead”, says Keith Lie, PricewaterhouseCoopers (PwC) asset management partner for Hong Kong. “Yes, there may, and will be, bumps ahead. But there’s no doubt China is still the engine of global economic growth especially with the current crises gripping Europe and the US.”

The continuing growth in product diversification and the introduction of cross-border activity, especially between China and Hong Kong, are also important recent developments in the internationalisation of China’s funds industry, according to a recent PwC report. It is this huge upside potential that will draw a significant number of new foreign participants into the marketplace, the firm adds.

These reforms – the most aggressive so far in terms of bringing the renminbi deeper into the international market – coincide with strong talk about the growing influence of China’s local currency amid the US and European debt crises, and its potential to become a core reserve currency and safe haven.

The reforms provide more investment opportunities for renminbi deposit holders in Hong Kong, many of whom have been wondering how to better maximise those assets amid the limited availability of investment products denominated in the Chinese currency. The limited number of so-called dim sum bonds (denominated and settled in renminbi) and synthetic renminbi bonds (denominated in renminbi but settled in other currencies) available in Hong Kong have thus far been the only investment channels for these renminbi desposit holders. With the latest reforms, more products are expected to be introduced.

DEPOSITS INCREASING

Renminbi deposits in Hong Kong totalled Rmb572.2bn ($89.4bn) in July 2011, up by 3.3 per cent and up more than five-fold compared with Rmb103.7bn in June 2010, according to Hong Kong Monetary Authority data.

“Whilst there are more and more dim sum bonds being issued, and other types of instruments start to emerge, by and large, the investable universe is still pretty limited,” says Sally Wong, CEO at the Hong Kong Investment Funds Association (HKIFA). “This is also a constraint to fund managers when they try to develop products.”

E Fund Management (Hong Kong), a subsidiary of Guangzhou-based E Fund Management, says it is ready to launch its RQFII business in the territory, but it is waiting for regulatory approval for its fund. Although the industry is still waiting for the final RQFII details from the China Securities Regulatory Commission (CSRC), E Fund has submitted an application to Hong Kong’s Securities and Futures Commission (SFC) for a preview, which the regulator has allowed.

The RQFII programme – initially capped at Rmb20bn – is an expansion of the US dollar-denominated QFII policy. It will allow Chinese financial firms to establish renminbi-denominated funds in Hong Kong for investment in China’s A-shares market. It will also allow institutional investors outside of China to facilitate investments of offshore renminbi deposits back into Chinese capital markets.

The broader QFII programme, meanwhile, allows foreign institutional investors to convert foreign currencies into renminbi to invest in China.

HSBC Global Asset Management, which is preparing to launch several renminbi products for high-net-worth individuals and institutional investors, is not dipping into the retail renminbi market in Hong Kong, for now. “We have to be very careful and see how things develop. We are working with the regulator to see what we can and cannot offer,” says Joanna Munro, Asia-Pacific CEO at HSBC Global Asset Management.

She notes, however, that the renminbi market in Hong Kong has been transforming at a faster pace since August. “One of the things we’ve observed is the market is developing very rapidly. Six months ago, we were concerned about the capacity to absorb the assets we might gather. But with all the developments and the issuances, like Tesco issuing in renminbi, there seems to be a lot going on.”

Ms Munro was referring to international retailer and UK supermarket group Tesco raising more than Rmb725m through a three-year renminbi bond offering in Hong Kong. Tesco is the fourth British group to issue renminbi bonds after Unilever, HSBC and Royal Bank of Scotland. Tesco entered China in 2004 and has a presence of more than 100 stores.

HSBC Global Asset Management is preparing to launch several new renminbi products in Taiwan, Europe, China and the US targeting high-net-worth individuals, institutional investors or wholesale clients.

The planned launches are in line with HSBC Global Asset Management’s goals of becoming a leading asset manager in the renminbi bond market and capturing investment opportunities in China. The company is capitalising on the roughly $500m it has already generated for its HSBC RMB Bond Fund and the track record it is building through that fund, which was launched in January 2011.

Elaine Wong, Hong Kong-based head of advisory, coverage and sales at Credit Suisse Private Banking Asia Pacific, says the bank has seen increased demand from both Hong Kong and Asian clients in renminbi-denominated products. Renminbi-denominated bonds on the Hong Kong market totalled around Rmb150bn in end-July, she notes.

“The latest measure will provide a channel for the renminbi to flow back to China, closing the circle for the global circulation of China’s currency,” she says. “Investors holding renminbi will also have more opportunities to put their funds to work as the total value of renminbi-denominated investable assets is still significantly below the total renminbi savings pool in Hong Kong.”

Credit Suisse’s offshore renminbi offerings include renminbi deposits, foreign exchange in renminbi, non-deliverable forwards in offshore renminbi, fixed income trading and structures such as bond options and renminbi-denominated mutual funds settled in US dollars. “There is also ongoing inter-regional coordination in anticipation of rapid strategic developments in renminbi internationalisation,” Ms Wong adds.

China’s latest reforms are likely to heat up activities in the Hong Kong debt capital market through more renminbi-denominated bond issues. In August, China issued four tranches of sovereign bonds through the Ministry of Finance, totalling Rmb13bn, notes Ms Wong. The subscriptions to the four tranches amounted to Rmb69bn, or 5.3 times oversubscribed.

“From this, we believe that the market will grow quickly although it will take some time for it to become well developed,” says Ms Wong. “Initially, we expect mostly top-tier mainland companies will come to Hong Kong to raise renminbi-denominated bonds in order to capitalise on the low interest rate costs attached to the renminbi-denominated bonds. We also expect renminbi-denominated sovereign bonds to continue to be issued out of Hong Kong and investors will continue to subscribe to these, albeit with very low yields.”

To increase the vibrancy of the market, it is important to have the avenues to channel back the renminbi, says HKIFA’s Ms Wong. She expects the renminbi flow in and out of Hong Kong to be “measured” rather than hurried, however. “As China has always been saying, the process of internationalisation is characterised by touching the stone and feeling the way forward,” she says. “Thus, the pace is measured and gradual, with the risks being well managed.”

The deliberate approach taken by the Chinese government is “especially pertinent” in the context of a global environment “plagued by uncertainties”, says Ms Wong, referring to the US and European debt crises, as well as inflationary pressures faced by emerging markets.

“China has been managing the process of internationalisation with knack and dexterity,” she adds. “It introduces strategic initiatives step by step, and paces them carefully and appropriately.”

Renminbi deposits in Hong Kong totalled Rmb572.2bn ($89.4bn) in July 2011, more than five-fold compared with Rmb103.7bn in June 2010

UK retailer Tesco raised more than Rmb725m through a three-year renminbi bond offering in Hong Kong

Rita Raagas De Ramos is managing editor of Ignites Asia

The evolution of a reserve currency

written by Elliot Smither

The ongoing economic turmoil in the US and Europe has accelerated the rise of China, and not only could its economy one day eclipse the US’s, but its currency could conceivably replace the dollar as the world’s premier reserve currency.

“We are seeing the evolution of a new reserve currency,” says David Bloom, global head of foreign exchange strategy at HSBC. “What makes a reserve currency is convertibility and liquidity. We are already seeing the gravitational pull of the renminbi onto other Asian currencies.”

It is clear that the Chinese are serious about the internationalisation of their currency. The recent visit by Li Keqiang, current vice premier and the man many believe could well become the next premier, to Hong Kong to oversee bond issues was as a very clear signal that China is serious about increasing the convertibility of its currency, says Mr Bloom. However, he warns this will be a gradual process, although the recent reforms have come much faster than many were expecting.

The establishment of the offshore renminbi market in Hong Kong in July 2010 was a major step forward towards the internationalisation of the renminbi, says David Pavitt, HSBC’s head of FX emerging market trading. “By internationalisation I mean full convertibility. To be able to buy, sell, lend and borrow a currency across international borders and without restrictions. Can we do that with the renminbi at the moment? No we can’t.”

He describes the internationalisation process as a doorway. “Five years ago the door was shut, but China wants the door fully open to allow reminbi to flow. Can they move the door from closed to open overnight? No they can’t. Some argue there would be a huge flood of money in, causing inflation, others that enough money has been made in China over the last 20 years that there would be a flood of money out.”

Either way, this would lead to instability, the last thing the Chinese want, warns Mr Pavitt. “Moving that doorway open too quickly would make the market unstable, certainly in China, and perhaps globally. So this has to be done gradually.”

Mr Bloom sees no reason for the rise of the renminbi to mark the end of the dollar as a reserve currency.

“Over time, there is no reason why we need to have only one reserve currency. If liquidity is there in the relationship between currencies then we can use others. Underneath we will always be asking ‘what is the dollar price?’ It will be a very long time until that is not the case. The renminbi and the dollar will both be reserve currencies, this is a long-term thing,” he explains.

“Think of tai chi and not karate – this is a slow and delicate process, not quick and violent.”

Elaine Wong, Credit Suisse