The IPO of billionaire Li
Ka-shing’s real estate investment trust Hui Xian is the first
outside Mainland China to be denominated in Hong Kong’s offshore
yuan renminbi currency, the CNH. Further IPOs are needed to add
depth to the CNY3OObn-plus market for the offshore currency. Will
Cain reports.


Factbox showing key developments in Chinese yuan renminbiThe booming offshore
market for China’s currency, the yuan renminbi, was boosted further
last month after the first yuan renminbi-denominated IPO outside
the country’s mainland.

Billionaire Li Ka-shing’s real
estate investment trust Hui Xian raised CNY10.5bn ($1.6bn). Private
bankers say greater bond and stock issuance by corporates in
offshore yuan renminbi, or CNH (see box, right), is needed
to help overcome liquidity and yield constraints and expand the
range of products available to clients.

Singapore’s DBS bank claims to have
been the first to offer yuan renminbi products to its clients while
OCBC launched two offshore deposit products early in March – a call
account and a time deposit product.

Nicholas Tan, head of global wealth
management at OCBC, said time deposits was its most popular yuan
renminbi product among investors.

The two main barriers preventing a
wider range of yuan renminbi products being developed is the lack
of liquidity in the market and the low yields on offer, according
to Marc Lansonneur, regional head of investment teams and market
solutions, Société Générale Private Banking (Asia-Pacific).


Restricted supply of
renminbi investment products

Clients want to hold yuan renminbi
in expectation of long-term appreciation of the currency against
the US dollar, Lansonneur said, but they also want some yield. He
said this could be achieved through bonds or structured products
but these were difficult to create because of the lack of liquidity
in the market.

“You can structure a lot of
things,” said Lansonneur. “We have a lot of structured products in
the pipeline but the problem is issuing them. There is still a lack
of liquidity in areas like options for example.

“We can not go faster than the
music. We need to wait for the market to be liquid before we can
offer the product.”

The CNH currency yields lower than
its onshore counterpart because of a liquidity mismatch at banks
which hold the deposits on their balance sheets.

The popularity of holding offshore
yuan renminbi deposits means banks in Hong Kong struggle to match
the supply of these deposits with demand for loans, resulting in
lower interest rates.

Twelve-month time deposits receive
an interest rate of 0.75% in CNH compared to the People’s Bank of
China base rate for the onshore currency of 3.25%.

“There are some strong investment
companies which plan to issue exchange-traded funds [ETFs] denominated in CNH in Hong Kong in the coming year,” he said.

“When we have this kind of issue
then we can construct products on top. The more underlying we have
on CNH, like bonds, equities and ETFs, the more structured products
we can build on them.”


Beware of early CNH bond
and stock issues

Richard Harris, chief executive of
Hong Kong-based Quam Asset Management, cautioned against relying
too heavily on early CNH bond and stock issues.

Harris said it was currently
preferable to invest in yuan renminbi-earning Chinese corporates
through investments on the Hong Kong and Chinese mainland stock

Quam offers a China-focused fund
which invests in yuan renminbi-neutral or yuan renminbi-positive
corporates listed in Hong Kong and also invests in the Chinese
A-share market through participatory notes and exchange-traded

“There is a limited pool of CNH and
there is an even more limited product,” Harris said.

“All of those at the moment are
fixed income, they are bonds and they are only issued by companies
that can not find money anywhere else.

“If you are a Chinese company and
you are going to raise money in Hong Kong, are you going to raise
it in US dollars at 1 or 2% or do you raise it in yuan renminbi at
6 or 7%? It’s just a no-brainer.”


The rise of the dim-sum

Quam is adding a yuan renminbi
share class to its existing fund to address client confusion that
although the fund is priced in US dollars, it is still a play on
the Chinese currency.

“This is why the great majority of
people misunderstand funds investing in different markets,” Harris
said. “We are investing in companies which have yuan renminbi
income and yuan renminbi costs. It’s a yuan renminbi asset through
and through.”

A lack of liquidity in the CNH
market is likely to be addressed by an increase in the number of
yuan renminbi-denominated bond issues and, after the Hui Xian IPO,
stock issues.

Since July last year, a number of
corporates have raised finance using bonds denominated in CNH,
called dim-sum bonds. Many of the companies are businesses which
are part-owned by the Chinese government or full government

The Chinese Ministry of Finance is one of the largest issuers to
date, selling RMB8bn in two, three, five and 10-year bonds. This
was seen as important because it lent official support to the
growth and development of the market.


See also:

Riding the
: HSBC’s view on internationalisation