Special Seminar: Offshore Renminbi (CNH) New York - March 19 2013 Offshore Renminbi (CNH) New York - March 19 2013
Special Seminar: Offshore Renminbi (CNH) New York - March 19 2013

Evolution of Offshore Renminbi (CNH) Market Discussed at EMTA Seminar

The evolution of the offshore Chinese renminbi (or “CNH” market) was discussed at a special EMTA seminar on Tuesday, March 19, 2013 in NYC.  Standard Chartered hosted the event in midtown Manhattan, with over 100 market participants in attendance. 

Mike Moran (Standard Chartered) led the event’s panel discussion.  2012 was another successful year in the development of the CNH market, he noted, while prompting views on what bottlenecks were constraining additional growth.  Sonja Gibbs (IIF) cited liquidity as the largest obstacle to further growth.  “Some large potential entrants to the market are just blocked right now due to liquidity concerns…obviously much progress has been made, but there is a lot of room to grow,” she stated.  AZ Funds’ Massimo Guiati concurred, noting that while liquidity has “definitely improved, it remains a slow process.”

Speakers acknowledged that many original market entrants had been attracted by a one-way bet on renminbi appreciation, a view that was challenged in 2012.  JPMorgan’s Jahangir Aziz argued that two-way volatility was the best possible development for the CNH market, as it has weeded out many of the pure appreciation plays.  “We no longer have an insatiable hope for a one percent appreciation every year; this is a very important step and now we have a proper funding curve….this legitimizes CNH as a currency,” he argued.

HSBC’s Apratim Chakravarty discussed the evolution of the CNH as currency.  The CNH was being increasingly used as a trading currency, he observed, pointing out that 12% of Chinese trade is now settled in renminbi.  Chakravarty expected that by 2015, this figure would rise to one-third of Chinese trade, “which will open up liquidity in this market.”

Discussing the potential future of CNH as a reserve currency, Gibbs pointed out that Central Banks in countries such as Brazil, Nigeria and Chile have already begun to accumulate CNH.  While other Central Banks would require their reserves be in fully convertible currencies, the actions of important EM Central Banks could be read as a statement of their long-term expectations, she suggested.

CNH-denominated bond issuance and credit quality were also addressed by panel speakers.  Moran observed that 2012 CNH bond issuance exceeded that of 2011, and it stood at five times the amount of CNH paper brought to market in 2010.  Chakravarty added that new issuances in 2013 could be more diverse, with potential issuances from Russia and Eastern Europe.

On credit quality, Aziz reminded the audience that issuances in 2010 were of lower credit quality, with issuers tapping into market hungry for renminbi currency bets.  “That now has been played out, the questionable-quality Chinese SME bonds have been taken out, and the mix of issuers is now better,” he affirmed.  Gibbs cautioned investors to consider the bond ratings, transparency issues, and lack of bond covenants, while Guiati highlighted the growing share rated CNH bonds as firms such as Caterpillar, McDonalds and Unilever tap the market.

CNH-denominated equities were not likely to be a new asset class in the immediate future, with one recent issuance disappointing, according to Guiati.  Gibbs spoke of the potential for the onshore corporate bond market.

The role of London as a trading center for CNH was revisited from the 2012 CNH seminar.  Moran displayed a chart demonstrating that London has surpassed Singapore as the second most important CNH trading center for since April 2012.  Gibbs attributed this to a very strong City of London initiative last year.

Following the discussion, the panel took a variety of audience questions addressing regulations, changes in the investor base and arbitrage opportunities.  Attendees were then invited to a cocktail reception. 

The seminar, which was made possible with the additional support of HSBC and JPMorgan, is one of a series of annual events focusing on CNH held each year in New York and London.  EMTA expects to confirm its London CNH seminar in the coming weeks.