A massive growth of offshore renminbi as China loosens controls is creating demand for investment products denominated in the mainland’s currency. Andrew Wood tracks developments.
When McDonald’s first restaurant in China opened in Beijing in 1992, it made the headlines around the world. It was a powerful media-friendly symbol of globalisation and China’s growing embrace of capitalism.
But few TV news bulletins covered another ground-breaking first for McDonald’s in China in August: the burger chain became the first foreign issuer of corporate bonds denominated in renminbi in Hong Kong. Institutional investors snapped up Rmb200m ($30m) of 3% notes, maturing in September 2013.
The renminbi is a long way from being fully convertible. But despite that, the pool of offshore renminbi has expanded rapidly as restrictions loosen. Hong Kong has developed with Beijing’s blessing as the main offshore centre for the Chinese currency. Renminbi deposits rose by 240% in the first 10 months of last year to a record of Rmb2.2 trillion ($32.9 billion), according to the Hong Kong Monetary Authority.
The rapid rise follows China’s extension last year of its cross-border trade settlement scheme: from 365 mainland businesses that could settle exports of merchandise in renminbi, to 67,359. Previously, businesses from just five mainland cities could use renminbi when trading with the ten countries belonging to the Association of Southeast Asian Nations. Now, firms and institutions in 20 cities and provinces can do so, and they can do that when doing business with any country in the world.
The environment is growing ever more complex. The exchange rate for offshore renminbi—CNH—is usually several percent different to that of its onshore CNY counterpart. Neverthelesss, the growing pool of offshore renminbi creates a very attractive opportunity for asset managers who want to launch renminbi-denominated funds.
The demand is there. Firstly, banks offer very low rates for renminbi deposits, so investors want better returns for their money. Secondly, China’s economic strength (as well as prodding by US politicians who think the renminbi is unfairly cheap) means that the currency is likely to continue its appreciation. The renminbi has gained nearly a quarter in value over the past five years against the dollar—and the Hong Kong dollar too, which is pegged to the US currency.
At the same time, the supply of RMB-denominated offshore investments is expanding. Previously, fund managers would be limited to using precious and limited quotas issued under the Qualified Foreign Institutional Investor scheme to buy mainland stocks.
The Hong Kong stock market operator, HKEx, is considering how to create a separate classes of shares denominated in renminbi.
The property developer Cheung Kong, owned by the tycoon Li Ka-shing, is planning to launch an RMB-denominated real-estate investment trust in Hong Kong in the first half of this year.
This would be the first renminbi initial public offering in Hong Kong. Dividends are expected to be paid in the Chinese currency. Reports in also suggest that the state-owned Bank of China may float a subsidiary in a renminbi-denominated IPO.
The Hong Kong arm of Haitong Asset Management, a Shanghai asset manager, was the first to launch a retail renminbi fund in the territory, a few weeks after the relaxation of rules on renminbi accounts, settlement and trading in July.
Others have followed. DBS of Singapore raised $80m for its bond fund in November.
“It’s been performing pretty well,” says Koh Liang Choon, who heads the DBS Asian local currency fixed income team in Singapore. “The main interest comes from private banking clients who think that the renminbi will appreciate.
“But you’ve got to bear in mind that this market is still in its infancy.”
The Canadian insurer Manulife is launching a series of products in Hong Kong denominated in renminbi.
Its first product is a single-premium insurance savings plan with five-year maturity, guaranteed returns and capital protection. The annualised return in renminbi is 1.8%, which is likely to be boosted in Hong Kong dollar terms if the renminbi’s upward trend is maintained. Details of further policies have yet to be released.
Wang Yu-Ming, Manulife Asset Management’s head of fixed income in Hong Kong, says developing its offshore renminbi business wasa priority.
“China is seriously betting for the renminbi to become one of the world’s future reserve currencies, and that in itself should make investors pay attention,” Wang says.
The range of offshore renminbi assets that investors can buy is increasing. “This is most attractive for long-term investors, as the market brings us a big expansion of the investable credit universe in Asia.”
Wang expects a wider range of mainland issuers of renminbi bonds than the big corporates and state-linked institutions that have dominated the offshore fixed income market. That would improve diversification.
Manulife’s experience of fixed income investing on the mainland, he says, confirmed the value of locally based resources to seek out opportunities that under-researched issuers might provide.
“Some of those names, you won’t find in any index. They are names without any international rating,” he says.
Another recent development is Shanghai’s pilot scheme for foreign private equity investors. Details started to emerge late in January of the $3bn scheme, which had been flagged up late last year.
Approved investors will be able to start joint ventures with local partners. They will be given quotas to convert foreign currencies into renminbi to invest directly in Chines companies or local currency funds—which is currently prohibited by China’s capital controls. Carlyle, Blackstone and First Eastern are widely expected to be the first investors.
What could go wrong? As with many reforms in China, there is a risk that politicians and policymakers may get cold feet. “Regulators have become more liberal,” says Manulife’s Wang. “But they could become less liberal again.”