EMTA CNH Efforts Continue with New York Forum
As part of its efforts to educate the EM community on the CNH or “Dim Sum” market, EMTA held its first seminar on the offshore Chinese currency in New York on Tuesday May 15, 2012. Standard Chartered hosted the event.
EMTA has previously held CNH-focused seminars in London in 2011 and 2012. The CNH market has also figured prominently among the topic on EMTA’s annual Hong Kong and Singapore panel discussions.
Mike Moran (Standard Chartered) led the afternoon’s panel discussion. “It’s exceptionally rare that we see a market of this importance in its nascent stages,” he stated, while adding that the evolution of the CNH market “would undoubtedly be a long and complex process.”
Moran asked speakers to discuss recent trends in the Dim Sum market. David Pavitt (HSBC) observed that hedge funds had initially played a dominant role in the market as they sought out arbitrage opportunities and profited from market inefficiencies. In addition, many funds who had bought CNH were doing so because of expectations of Chinese currency appreciation. More recently, however, the market has evolved to include those who “are engaged in real trade flow…who want CNH because they want the currency to settle import or export orders,” according to Pavitt.
The IIF’s Sonja Gibbs viewed the market from an issuer’s standpoint. “We would argue that there could well be an increased desire by issuers to get into the market now that the direction of the renminbi is no longer a ‘given;’ corporations don’t want to have to issue into an appreciating currency,” she reasoned. Gibbs acknowledged that liquidity remained a concern for investors.
Jahangir Aziz of JPMorgan concurred that fundamentals have replaced speculation as key drivers of the market. He argued that Chinese provinces would eventually need to issue debt to resolve the bank loan problem, and this would provide further impetus for the market on the supply side. New uncertainty of the direction of the yuan would also increase interest in the CNH market on the demand side. Aziz cautioned attendees that the evolution of the market would be subject to domestic political considerations.
Woon Khien Chia (RBS) discussed potential new corporate issuers. In addition, sovereigns have started to tap the CNH market, she noted. In her view, there are increasing signs of new opportunities opening up, such as the potential for reverse repos.
Full convertibility might occur within 5-7 years, Pavitt believed. “This is a big change; when this market first opened up, we had all thought it would be a 30-year process.” Aziz argued that Beijing would continue to allow the CNH experiment to continue, as long as CNH remained a small percentage of the Chinese money supply. “I am not sure at what level they will become concerned, but at some point it will become a policy issue,” he commented.
The demise of the Hong Kong dollar was debated. “The easy answer is that Basic Law ensures Hong Kong will have a separate currency until 2047, and this has worked well for China,” noted Aziz. Chia added that the Hong Kong currency board would continue to issue dollars as long as there was interest.
“It is not clear that China’s goal is necessarily a larger role in international finance,” stated Gibbs, as the panelists discussed Beijing’s motives. “Being a reserve currency can be viewed as a poisoned chalice, it is not always clear the benefits outweigh the costs”, added Moran. Chia argued that Beijing was fully aware of the changes, such as greater fluctuation in capital flows that would follow when/if the CNH became a reserve currency. “They are ready for it,” she affirmed. Chia viewed pricing power as an important motivator for Beijing.
The panel also discussed CNH becoming an SDR currency (“inevitable” according to Gibbs, who offered a 3- to 5-year time frame); the growing number of Central Banks now holding CNH as an asset; and the roles of London, Singapore, Hong 5Kong and Shanghai as CNH trading centers (“Singapore overplayed its hand in talks with China,” according to Chia, and the joint Sino-British appearances to promote London as a CNH center were critical).