The steady rise in the value of China’s renminbi currency and the ascent of its still relatively modest offshore RMB bond market present rich opportunities for investors – and HSBC Private Bank is determined its clients get plenty of the action.

The steady rise in the value of China’s renminbi currency
and the ascent of its still relatively modest offshore RMB bond market present
rich opportunities for investors – and HSBC Private Bank is determined its
clients get plenty of the action.

At present, the offshore bond market is expected to reach
RMB350 billion ($56 billion) of issuance by the end of this year, up from
RMB275 billion in 2012, the bank has argued as recently as April. The offshore
RMB market already works as a platform for renmbini activities by
non-residents; in Hong Kong, such deposits in the currency surpass RMB800
billion, while the offshore RMB, or “Dim Sum” bond market amounts to RMB260
billion (Source: Bank for International Settlements). These amounts, while big,
are still dwarfed by the multi-trillion size of the dollar and euro debt markets,
for example.

But given the rapid pace of economic growth in China and other
Asian countries – despite some concerns – the potential for further gains is
helping to drive the launch and development of new renminbi-based products by HSBC Private Bank, senior managers at the Hong Kong/London-listed firm told
this publication recently.

“One reason for the interest in this currency is that it is extremely
important to get currency calls right and there has been a lot of volatility in
sterling, the euro, yen recently,” Willem Sels, director, UK head of investment
strategy at HSBC Private Bank, said. Meanwhile, the RMB has shown a gradual
appreciation in recent years, he said.

“People are looking for portfolio safety and diversification and also the value of
an additional currency, and once that appears to be on a path of gradual
appreciation it is extremely attractive to clients,” Sels told this publication in
an interview at his firm’s offices in the St James’s district of central London.

The steadiness of the renminbi’s ascent is a part of the appeal: if the
currency had shot up like a rocket it might now be giving investors a worry
about a sharp correction and a sudden move by the authorities to control
capital flows. That isn’t happening.

The RMB has been appreciating at a gradual rate of around 2 to 3 per cent
for the past three years. “If you can add that [appreciation effect] to a bond
portfolio, that’s attractive,” he said.

“Of course one has to be willing to assume that the
[Chinese] government has an incentive to slowly, steadily let the RMB rise.
They want the currency to be internationally accepted,” he said.

Steady vs volatile

An additional attraction with holding the renminbi – or yuan
– is that the behaviour of this currency has been far less volatile than that
of Chinese equities in recent years, said Sels. (The Shanghai Composite Index
has risen by around 6 per cent since 2 May due to market expectations that the
Chinese government will push ahead with some economic reform measures. 30-day
volatility this year is just under 20 so far this year.)

Sels argues that the RMB will “stop rising at some point”. “We are pretty
close to fair value on the level now,” he said, referring to the RMB in terms of
purchasing power parity. The Chinese authorities want the RMB to be widely used
as a trading currency, as an investment currency and as one of the world’s
reserve currencies. “That is why people like to have the RMB in a portfolio.”

He mentioned the attractions of ploys such as dual currency deposits.

Typically,  a deposit holder can earn an enhanced return or
coupon, regardless of the performance of the deposit currency. The
depositor will retain the deposit currency at maturity if it has not
appreciated above the pre-determined
level.  If, on the other hand, the deposit currency does appreciate
beyond the pre-determined level (strike price) then the client will be
converted into the alternative currency.

The scope for expansion can be seen this way: The Bank for International
Settlements, as mentioned briefly above, has pointed out that there are
parallels between the rapid ascent in the 1970s of the offshore dollar – or Eurodollar
– market and the current situation.

Meanwhile, three years after controls were freed up, about
10 per cent of Mainland China’s
total trade, about 12 per cent of foreign direct investment into China and about 4 per cent of outward direct
investment from China
are settled in RMB. By contrast, some 30 per cent of Japanese trade is settled
in yen, 50 to 60 per cent of eurozone trade is settled in euros and 80 to 90
per cent of US
trade is settled in dollars.

Getting products right

Sels’ colleague, David Rumsey, who is director, head of product specialists at
the private bank, reckons HSBC has been at the cutting edge of providing
RMB-based products to clients.

“Since the offshore market became open in the renminbi in 2010, we have
developed a range of products,” he said, citing areas such as treasury products
through to structured and derivative-based products. “It is very broad,” he
said. A person, for example, who is either seeking to hedge foreign exchange
risk, or use currencies in a tactical play, can do so. “We are finding that
interest is growing all the time and clients are become better educated about
it,” he said.

Clients who are looking to spread risk beyond, say, the euro, sterling or
dollar can buy or sell options in renminbi, he continued. “There is also a
curiosity…some private clients might find renminbi products a bit exotic but
their awareness is growing, as is the liquidity of the market. It is going to
become more and more mainstream. It is also something that people can’t ignore,”
he said.

“We see more interest in using RMB as an investable asset. For example,
investing in a structured product where the underlying performance of a bond is
based on, say, an equity index such as the S&P but the product is
denominated in RMB.” He said one advantage for investors is the positive carry
to be earned – or yield pickup – in such cases.