HONG KONG (Dow Jones Investment Banker) – As the amount of yuan held in deposit accounts in Hong Kong (so-called CNH) continues to pile up, China’s offshore financial product offering slowly expands, despite current restrictions on convertibility.
The biggest prize, though, is yet to come, as the introduction of equities, ETFs and derivative products should enable a rapid increase in trading volumes. The race is on to capture market share, especially as a number of international issuers are believed to be interested in the possibility of listing equity on the mainland – on Shanghai’s forthcoming International Board.
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Deposits in Hong Kong denominated in CNH (or renminbi, that is “the people’s money”) have continued to grow at an exponential rate, as the Chinese currency is increasingly used to settle cross-border trade transactions with the mainland. From only US$1.9 billion equivalent in December 2004, these deposits reached an all-time high of more than US$85 billion in May 2011, having grown by 47.9% this year alone.
By all accounts, it’s not yet an open and transparent market: Individuals and corporates alike continue to face a number of restrictions.
For individuals, there is a daily exchange limit of 20,000 yuan per person, with onshore remittance capped at 80,000 yuan per account and per day. And while consumers from Hong Kong can now use cheques denominated in Chinese currency to buy goods in the neighboring province of Guangdong, a daily limit of 80,000 yuan also applies there. Loans to individuals are still not allowed.
For corporates, Bank of China (Hong Kong) remains the only clearing bank, while the amount of trade finance remains limited to specific trade transactions. Offshore remittances also require approvals from the authorities in the PRC.
In spite of this, there is already a relatively wide offering of yuan-denominated financial products in Hong Kong. These range from the classic retail and corporate banking suite to debt, investment funds, commodity products and even investments in Hui Xian REIT – to date the only listed corporate equity product in Hong Kong denominated in Chinese currency. The money market offers spot, forward and non-deliverable forward instruments, as well as FX options. And insurance products are now also available.
The next step will be the launch of RMB-listed equities, ETFs and related derivative products.
Some 28 issuers have already tapped the “dim sum” bond market (i.e. bonds denominated in yuan that are issued offshore, in Hong Kong or in Singapore). From January to May 2011, this represented an amount of US$4.3 billion, bringing total issuance since 2007 to almost $16 billion. Issuers have ranged from the PRC government to both Chinese and international banks. International organizations such as the World Bank and the Asian Development Bank, as well as PRC corporates and multi-national corporations have also featured.
At the end of June, HKEx released a framework offering viable – although still high-level – alternatives for the structuring of yuan-denominated IPOs. These would be supported by the long-awaited trading support facility to enable currency conversion, currently impaired by exchange limit restrictions. The support facility is now formally on track for September or October.
All these steps require coordinated and concerted effort from a variety of market participants, including the People’s Bank of China, the Hong Kong Monetary Authority, government departments both on the mainland and in Hong Kong, HKEx, as well as share registrars, banks, brokers and corporate issuers. So–like dim sum – this requires slow cooking, while a rather hungry crowd awaits.
Meanwhile, Singapore, already a major financial centre for foreign exchange and wealth management, has clearly stated its own ambitions to capture a share of the CNH pie and develop as a major offshore trading centre. Dim sum enjoyed a successful debut there in May, with a 3 billion yuan (US$466 million) issue from GIC’s Global Logistics Properties.
Watching the three-way dance between the mainland, Hong Kong and the Lion City should prove fascinating.
(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at https://www.ipo-book.com. Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email [email protected]).
[This article was originally published on Dow Jones Investment Banker on 29 July 2011 and is reproduced with permission.]
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