Reforms pave way for the renminbi

Cinese 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 (E65bn) 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.”

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.”

CLOSING THE CIRCLE

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.

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.

Rita Raagas De Ramos is managing editor of Ignites Asia