Offshore RMB Bond Market Has Far Further Upside Scope - HSBC Private Bank

Tom Burroughes

16 July 2013

The market for offshore yuan, or renminbi, bonds ("dim sum bonds") is relatively modest compared with the scale of China’s economy – the world’s second-largest – and recent uncertainties do not detract from its strong growth prospects, argues HSBC Private Bank.

Recent data has raised some uncertainties about the pace of China’s economic growth, which is weighing on the country’s equity market, the bank said in a note.

The expectations that the renminbi will appreciate will not, however, be dented by certain developments, Esty Dwek, investment strategist, said.

“We believe that the internationalisation and the liberalisation of China’s financial markets will include the ongoing appreciation of the renminbi, in a gradual manner, and we believe that investor interest in the currency and the dim sum bond market will only rise over the long run,” Dwek said.

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. “This is still very small compared to other bond markets and compared to the size of the Chinese economy. As this sector continues to grow, we expect investor interest to increase, in part thanks to the pick-up in yield,” Dwek continued.

“China has been back in the headlines in recent weeks, as the country’s latest economic data releases were weaker than expected and, consequently, growth expectations for 2013 may need to be scaled back. While this may lead to some questions about the impact on equity market performance in the coming quarters, we believe that one area should continue to appreciate in a sustainable – albeit gradual – manner, the renminbi. Indeed, the RMB has continued to steadily appreciate in recent weeks, with daily fixings at record levels – a trend we believe will continue,” Dwek said.

International reach

Dwek points out that China, the world’s largest exporter, is expected to chalk up a GDP growth rate in 2013 of 8 per cent, and holds foreign exchange reserves of around $3.6 trillion and rising.

“What may be more surprising is how small the renminbi market is compared to the size of China’s economy. Indeed, the RMB makes up only a very small portion of global foreign exchange reserve assets, and the daily turnover of the currency is barely in the top 10 globally. According to HSBC and the Bank for International Settlements, the RMB would have the third highest turnover among global currencies if it were fully convertible. Thus, the RMB presence globally should continue to increase over the coming years, as China completes its renminbi internationalisation process and opens up the currency to growing foreign ownership,” Dwek said.

Dwek continues: “Renminbi internationalisation is part of the government’s broader financial market liberalisation process, which is expected to continue under the new leadership that took over a month ago. One objective, in our view, is for to cope with appreciation pressure due to strong capital inflows.”

Dwek said that in the first quarter of this year, inflows were at levels not seen since 2011, – rising by $128 billion – despite weaker-than-expected growth.

The currency is likely to be, in time, a major beneficiary of the impact of developed countries’ central banks/governments depreciating their currencies via quantitative easing.