Rise of the RMB

Rise of the redback

New bond issues to flag renminbi’s internationalisation in the year ahead?

Fancy a light lunch? That’s a new possibility for fixed income investors, now that Dim Sums have joined Kangaroos, Maples, Yankees, Bulldogs and Samurais on the eclectic list of bonds issued in foreign currencies on domestic bourses.

All of the above have guessable origins, playing as they do to a cultural stereotype or two. There are even rouble-denominated Matrioshka bonds, taking their name from the Russian wooden dolls.

And so it is with Dim Sum, now the de facto label for renminbi-denominated bonds issued in Hong Kong (hence the association with the Cantonese meal of that name).

In fact, Dim Sums differ from their peer group in at least one important characteristic: they’re issued offshore rather than in the currency’s home market. That makes them different to the small number of Panda bonds (name creativity running wild, again) that have also been issued in renminbi, although only within the People’s Republic of China itself.

Confused yet? Fortunately, the bigger picture – the rapid rise of China’s currency beyond its own borders – is easier to grasp. The Dim Sum market turns out to be a culinary flourish in what HSBC is calling “a financial revolution of truly epic proportions” – a multi-pronged strategy to “internationalise” the renminbi.

As the world’s largest exporter and now its second largest economy, China’s currency was always going to become more of a rival to the dollar. But the task seems to have become more urgent as Beijing grasps the full magnitude of its “dollar trap”, not least as quantitative easing floods in from Washington.

Currencies have always tracked shifts in the economic balance of power, from the Spanish dollar of the 1600s (“pieces of eight” in pirate parlance), through sterling’s rise to 19th century dominance (up to 90% of international trade was priced in pounds) and on to the US dollar takeover after World War Two.

More recently, the Deutschmark and the yen underwent their own ‘going out’ process on the back of the export strength of their national economies. And it’s trade flows that are shaping the renminbi’s rise, with rule changes that now make it possible for companies outside China to pay for (and invoice) trade transactions in yuan rather than dollars.

Cue what must be one of HSBC’s biggest quantitative forecasts in recent times: that at least half of China’s cross-border trade will be settled in renminbi within 3 to 5 years. That is a $2 trillion call – and a massive increase on the less than 3% of cross-border commerce being conducted in yuan today.

Which is where the Dim Sums come in. When the new trade settlement options in renminbi were launched last year, they created more offshore yuan. The question became what to do with them?

Beijing began to provide a few options. Banks were the first to get approval to sell Dim Sums in Hong Kong. In July, city blue chip Hopewell sold a Rmb1.3 billion infrastructure bond and in August McDonald’s became the first multinational to tap the market. Last week Caterpillar, the US-based manufacturer of earthmoving equipment, launched a two-year Rmb1 billion bond with a coupon of 2%.

This heralds Hong Kong as a major winner in the renminbi’s rise to prominence, making it the leading offshore yuan centre for the foreseeable future. Expect more announcements ahead: Hong Kong’s yuan deposit pool had surged nearly 240% to Rmb150 billion in first 9 months of 2010, more than three times the value of dim sums issued in the same period. Policymakers may also be considering renminbi denominated IPOs – as they “widen and lengthen the runway” for take off, says HSBC.

This is all some distance from China’s ‘redback’ displacing its greenback rival, HSBC counsels. Full internationalisation follows three steps: trade settlement, cross-border investment and then reserve currency status. Phase one is well underway. Phase two – Dim Sums on the menu – is starting up. But phase three may still be “decades away”, as it will require Beijing to liberalise its exchange rate, drop capital controls and permit large foreign holdings of domestic bonds. That looks unlikely on current horizons, so investors will have to make do with their Dim Sums for a while instead.


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