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Raising a glass, and hopefully a bond or two: Li Keqiang in Hong Kong

Moments of personal theatre are rare for China’s leaders nowadays, who often seem reluctant to stand out from the crowd. But Li Keqiang looked comfortable enough in the limelight last week, during his trip to Hong Kong.

In the final section of a speech to a local university, the vice-premier suddenly switches into English. As first he falters a little in his delivery. But he soon warms to his task, making himself heard above the ringing of a rogue mobile phone.

As we noted in WiC118, Li’s arrival in Hong Kong has been taken as further evidence that he will replace Wen Jiabao in a little over two years time. But the visit is also being seen as a major effort to promote Hong Kong’s emergence as an offshore hub for the renminbi. Before, during and after his trip, there were at least 11 announcements related to this goal.

The list included the biggest dim sum bond offering yet in the territory, courtesy of Rmb20 billion of bonds from China’s Ministry of Finance.

Also: the news that a much wider range of Chinese companies will be allowed to sell renminbi bonds in Hong Kong. Prior to this only those with a legal presence offshore could do so, and even then only if they had sufficient assets outside China to back up bond sales.

The prospects for dim sum issuance have widened, agreed HSBC’s credit research team in a research note last week, although the report’s authors also thought that the immediate impact of the new rules was likely to be limited.

Foreign firms have been able to sell dim sums for a while, with no real restrictions in place. But there is a catch: the PBoC, the central bank, and SAFE, the custodian of foreign exchange reserves, must give permission before the proceeds can be sent across the border into China.

Uncertainty here has been a key reason why more multinationals have not sold dim sums in Hong Kong, even when the yields being paid by issuers look very competitive.

Although a formal procedure does seem to be taking shape, permissions continue to be granted on a case-by-case basis.

This also looks like being a factor for Chinese corporations, despite the announcement that they will get the green light to sell dim sums in Hong Kong too.

In fact, HSBC says that they can expect additional oversight for their Hong Kong fundraisings, with regulators likely to apply criteria used in the domestic bond markets (for example, in setting caps against debt to asset ratios).

Why impose any limit on the flow of renminbi back into China from offshore?

The context is China’s battle with inflation. Regulators do not want to make it any easier for companies to raise capital in Hong Kong and then splurge it on frothy investment at home. Their resolve to filter out speculative inflows shows no signs of weakening, especially with rumours that Washington might launch a further round of quantitative easing in the coming weeks.

But that creates problems for those who want to see the renminbi become an international currency at a quicker pace. Capital controls are contributing to an imbalance between a growing pool of renminbi deposits building up offshore (primarily in Hong Kong) and a shortage of investment options open to those who hold them.

Since last summer, when Beijing loosened rules allowing Hong Kong residents to hold renminbi in their bank accounts, yuan deposits have increased to Rmb554 billion, or almost 10% of the total amount on deposit in the city. That was a fivefold increase on the year before.

Simply put, most account holders will want returns above the low-level interest rates now available on their deposit accounts. Fortunately, the widespread belief that the yuan will gain in value against other currencies has kept much of the demand for better investment options in check. But this won’t last forever.

Similarly for foreign companies: they are less likely to want to be paid in yuan for the goods and services they sell into China if they can’t do much with the cash.

And if corporate treasurers are not taking payment in yuan, it’s less likely that they will rush to pay their own bills for Chinese goods with it.

So the challenge is to find ways of boosting cross-border circulation of the Chinese currency in a manner that increases its acceptance on a global basis.

Hence another of the gifts in Li’s goody-bag in Hong Kong last week: a new scheme allowing foreign investors to spend some of their offshore yuan on mainland securities. The RQFII scheme (named for RMB Qualified Foreign Institutional Investors) is to be launched by the end of the year.

Again, there are caveats. The initial quota of Rmb20 billion ($3.1 billion) looks small, warns the China Daily, especially compared to daily transaction volumes of more than Rmb100 billion on the Shenzhen and Shanghai exchanges.

Tom Holland at the South China Morning Post also sits firmly in the unconvinced camp on RQFII, pointing out that the share prices of many Chinese firms listed on the mainland are higher than their equivalent price in Hong Kong.

Why bother buying a Chinese stock in renminbi when you have to pay a premium to do so, asks Holland?

The Chinese press prefers to concentrate on the symbolism of the move. Futures Daily, accepting that the quota is a small one, still thinks the scheme will prove a success, not least in prompting wider debate on stock trading strategy in China.

Commentator Ye Tan told Securities Times something similar: that further foreign investment in the domestic market would be a positive in promoting market discipline.

But in a further sign that the Chinese authorities are grappling with the issue of how to allow offshore investors more access to onshore asset markets, the Ministry of Commerce has issued a proposal soliciting feedback on revisions of the rules for foreign direct investment.

Currently, renminbi-denominated FDI is also approved on a case-by-case basis too, despite calls for a more transparent, standardised process.

Under the new proposals, the Ministry seems to be offering greater freedom to investors from Hong Kong, Macau and Taiwan, with a loosening of the approval process, subject to deal size and sector.

As HSBC notes, the proposals are not yet enacted and other governmental bodies will have to signal their own consent if they are to come into effect. But they do look like another positive signal, as Beijing works to open up more investment channels in support of the renminbi’s rise.

Editor’s Note: With China’s currency increasingly in the headlines, WiC has created a new section, ‘Rise of the RMB’ to feature stories on the topic. This can also be found on our website (www.weekinchina.com).

Next month we will also be publishing a Focus Issue, looking in more detail at the renminbi’s growing importance for the global economy.

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