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Friday, 19 July 2019

Renminbi Capital Markets: Showing new strength

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A shaolin monk breaks an iron sheet with his head during a performance at a temple in Quanzhou, Fujian.

Renminbi Capital Markets: Showing new strength

Source: REUTERS

A shaolin monk breaks an iron sheet with his head during a performance at a temple in Quanzhou, Fujian.

A little volatility can be a good thing. For years, since China began opening its currency to overseas buyers, investors have had a free ride. The renminbi has steadily gained about 25% against the US dollar, making the overseas Dim Sum market one of the world’s biggest one-way bets.

That appreciation trend helped drive international interest in the renminbi, turbo-charging Beijing’s efforts to make the currency more internationally acceptable. After the early surge in trading, however, doubts quickly took hold. Did China’s “internationalisation” of the renminbi – and with it the opening of the country’s entire financial system – depend entirely on expectations of appreciation?

Certainly, the early crop of unrated Dim Sum bonds catered more to fast money than to long-term credit investors, but the question had bigger implications. Was China’s growing clout in the global economy a fleeting figment of the imagination, founded on nothing more than international speculation on its currency?

This year’s sudden reversal in China’s official exchange rate has provided the answer. The ferocity of the engineered correction was a nasty surprise, but it has banished any remaining speculators and, with it, all lingering doubts as to the extent of real demand for the renminbi.

After a near 4% slump in little over three months to April, opinions are divided as to the direction of the currency for the remainder of 2014 and beyond, but deal-making in the currency has continued throughout the year.

Offshore renminbi bond sales are running at a record pace, albeit mostly from very high-rated issuers. Firms still need funding, and the universe of long-term investors has grown deep enough to provide it – regardless of short-term fluctuations. Currency trading now flows in two directions.

For China’s regulators, the short-term pain has already produced long-term benefits. Having driven away the speculators, China can be more confident in the extent of true demand for its currency at a time when it is moving slowly towards full convertibility.

However, despite the stronger foundation, that moment remains some way off. Interest rates must be freed, and domestic capital markets strengthened to cope with the transition, while overseas players need better hedging tools and longer-tenor assets to embrace the renminbi as a reserve currency.

The recent volatility has also shown, without any doubt, that Beijing still determines the currency’s future and, if China’s regulators continue to see value in volatility, renminbi investors may be in for a bumpy ride.

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

Contents

OVERVIEW

Picking up pace

China is taking steps to open its capital account and internationalise the renminbi, putting it on track to become one of the world’s top international currencies.

OFFSHORE CENTRES

Hub rivalry

The competition between the world’s financial centres to establish their offshore renminbi trading credentials has emerged as one of the most visible signs of the currency’s internationalisation.

FOREIGN EXCHANGE

Two-way traffic

The renminbi is on track for its worst year against the US dollar since the peg was partially removed in 2005 after rising steadily for years. What used to be a one-way bet is now more volatile than ever.

DOMESTIC BONDS

Opening doors

China’s capital markets are set to become deeper and more transparent as regulators allow more foreign investors to purchase domestic securities.

REGULATION

Testing the ground

The Shanghai Free Trade Zone has become a testing ground for China’s efforts to open its capital markets and to accelerate the transition towards a freely convertible currency.

DIM SUM BONDS

Growing up fast

A record feast of offshore renminbi bonds and the shift to a more stable investor base is underlining the Dim Sum market’s maturity with global deposit pools deepening and demand for overseas investment growing.

EQUITIES

Shanghai and beyond

Brokers have hailed news of a cross-border stock-investment programme between Shanghai and Hong Kong as a key step in opening China’s markets after a small number of early obstacles are sort out.

STRUCTURED FINANCE

Helping hand

Global automakers are bringing international standards to China’s nascent securitisation market and, in the first half year, there have been more such domestic transactions than in the previous nine years combined.

 

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