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EMTA Special Seminar on Offshore Renminbi Market - April 20, 2011

EMTA Hosts Special Seminar on Dim Sum Market in London on April 20

EMTA’s Special Seminar on the Offshore Renminbi (“CNH” or “Dim Sum”) Market was held in London on April 20, 2011.  Approximately 150 market participants attended the event, which was sponsored by The Royal Bank of Scotland.

Robert McCauley, Senior Advisor at the Bank for International Settlements, delivered the meeting’s keynote address.  In his prepared remarks, McCauley provided a general overview of the internationalization of the renminbi, and also discussed recent developments.

The move by Beijing to develop an offshore market for the Chinese currency while maintaining extensive capital controls on cross-border flows was simply unprecedented, McCauley began.  “No other country has set out to develop an offshore market any more than a country’s broadcast authority has set out to develop offshore radio stations,” he stated. 

Traditionally, officials of a country generally react to the development of an offshore currency market with an initial refusal to recognize its importance, and only begrudgingly accept its existence after adopting a variety of tactics to handle it.  In contrast, Beijing has recognized the importance, and inevitability, of an offshore renminbi market, and has sought to play a role in its development.

McCauley reviewed the main reason why Chinese officials would want an internationalized renminbi.  An internationalized currency allows a country to diversify some of the foreign exchange risk that it runs with the rest of the world.  By having China’s net claim on the rest of the world denominated in renminbi, external borrowers bear the risk of renminbi appreciation.

The use of the renminbi as a reserve currency by China’s major trading partners was unlikely to precede the development of an active offshore market, according to McCauley.  He cited the offshore use of the US dollar as key to its status as a world currency.

The internationalization of the offshore renminbi has recently accelerated, McCauley noted.  Hong Kong residents have taken more advantage of their ability to purchase renminbi, and trading in the offshore “CNH” currency has reached perhaps US$1 billion per day.  Banks and multinational firms have issued renminbi-denominated bonds, and now equities, in the offshore Hong Kong market.

How the renminbi market will evolve and how the currency will be internationalized in the future remain open questions, McCauley noted.  The role of the non-deliverable forward market (NDF) in the renminbi is unclear—the offshore renminbi market might displace it while both remain distinct from the onshore market.  Alternatively, the NDF market, the on-shore and off-shore renminbi markets could all co-exist until capital controls are removed.  He added that concerns of “lopsided internationalization” (i.e. foreigners wanting renminbi-denominated assets but not liabilities) remain as trading partners have in recent months “proved keener to accumulate renminbi receivables than build up renminbi payables.

Following his presentation, McCauley took a number of questions from the audience.  London would be a natural third off-shore market for the renminbi, he ventured, following news reports on the day of the seminar that Beijing would soon allow renminbi trading in Singapore. 

Woon Khien Chia (The Royal Bank of Scotland) moderated a panel of market experts following the presentation.  She first asked panelists for their thoughts on opportunities in the CNH market.  Tim Condon of ING believed that the CNH-denominated bond markets were poised for healthy development after Beijing took measures last October to discourage speculation in the market.

Aviva Investors’ Kieran Curtis suggested that, on a practical level, there were limited opportunities for a European-based fund manager.  “One hears about deals late, as the roadshows only take place in Hong Kong and Singapore, and sometimes the credit quality is low or one doesn’t know the issuer well.”  He continued that  managers were often forced to spend vast times analyzing an issue for which they might receive a minimal allocation, often much smaller than the allocation they would expect on a comparable Eurobond issue.  However, he highlighted that “the issues that we have been able to get, we are pretty happy with; we get the renminbi exposure that clients want without the exorbitant costs of the NDF market.”

Callum Henderson (Standard Chartered) agreed that the supply of CNH-denominated bonds was limited, though it was picking up, with ‘Dim Sum’ bonds largely focused on  high-grade names while ‘synthetics’ were more dominated by high-yield.

The panel concurred that the renminbi would eventually take its place as a word reserve currency,  with Condon and Henderson further agreeing that develop this was likely to occur within  5 to 10 years, “a big development, as last year people could have said 20 to 30 years,” observed Henderson. 

Market consensus also remained that the renminbi would appreciate approximately 4-5% versus the US dollar.  Kieran noted that “no one would borrow in renminbi because we all know it is going up, right?”

Finally speakers speculated on the eventual role of the Hong Kong dollar.  “One currency, one country is the endgame, right, but why can’t the HKD last another 5 to 10 years before it is repegged to the renminbi?” asked Condon.  Other panelists agreed that the HKD could “wither and die” as renminbi supply grows, and the market began to post prices in both currencies.

A cocktail reception sponsored by The Royal Bank of Scotland followed the meeting.  EMTA hopes to hold additional seminars on the development of the CNH market in the future.