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Friday, 19 July 2019

Renminbi Capital Markets 2013: On stronger footing

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Chen Yanqing of China lifts 106kg in the women's 58kg Group A snatch weightlifting competition at the 2008 Olympic Game in Beijing on August 11.

Source: Reuters/Oleg Popov

Chen Yanqing of China lifts 106kg in the women’s 58kg Group A snatch weightlifting competition at the 2008 Olympic Game in Beijing on August 11.

A sense of enthusiasm is returning to the offshore renminbi markets. Singapore has just introduced renminbi clearing, already resulting in the first foreign-exchange trades to be cleared locally, and DBS and HSBC are now vying to be the first to offer locally settled renminbi bonds to the city state’s investors.

Taiwan is a couple of steps ahead and cross-strait relations mean renminbi usage has been growing fast since licences were first awarded earlier this year. Banks there are already taking advantage of the island’s captive renminbi pools for their own funding.

London, too, is poised for a leg-up in renminbi business from the Bank of England’s negotiations of a sterling/renminbi swap line with the People’s Bank of China – likely to be the world’s biggest so far.

All are welcome changes after a quiet 2012. Fears of a Chinese economic slowdown and uncertainty over the country’s political succession distracted investors and policymakers alike, leaving few headline developments of note.

The rebound in international interest, meanwhile, is coming as China is again allowing its currency to appreciate. That raises the question of whether the renewed enthusiasm is the result of further reforms and genuine trade flows or simply speculation on the currency.

Forex gains certainly drove exponential growth in offshore renminbi holdings in the early days of the market’s development, compressing yields on Dim Sum bonds before a period of consolidation left at least some of that looking overdone. Pure currency speculation risks sending misleading signals of the renminbi’s development, and a return to that dynamic is best avoided.

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It’s not clear that the latest wave of interest goes beyond that – at least from the offshore bond market. The sudden dominance of high-yield new issues suggests investors are more speculative than ever, accepting tough credit risks in return for a big, appreciating coupon.

That, however, misses the point. The reforms, implemented in 2012 and earlier this year, have put the renminbi’s internationalisation on a stronger footing. In a key recent move, China’s top policy body has called for the currency to be fully convertible by 2020, reaffirming the country’s commitment to opening its capital account at a manageable pace.

Global interest is key to creating the two-way market needed for the internationalisation process. The renminbi needs to find the right price before the door is fully opened: too weak risks creating a speculative bubble; too strong, and China’s billion-odd savers may quickly move their money elsewhere.

With the political will and global enthusiasm behind it, there can be no doubt that China’s currency is destined for a big international role. The capital markets will play a big part in helping it get there.

 

Chapters

OVERVIEW: Busy behind the scenes

FOREIGN EXCHANGE: Convertibility hurdles

UNITED KINGDOM: London calling

TAIWAN: Regional ambition

DIM SUM BONDS: Back on the menu

HIGH YIELD: High hopes

EQUITIES: Slow progress

LOANS: In search of borrowers

 

To see the digital version of this report, please click here.

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