The Offshore RMB Market: Start of the Yuan Liberalization?

by Alberto Forchielli and Alberto Pagliarini
Hong Kong RMB deposits have hit RMB130bn in August 2010, up from RMB100bn just 2 months ago. The offshore RMB market started in Hong Kong in 2004 but two important changes in June/July 2010 will likely cause a dramatic increase of the RMB deposit base in Hong Kong.
In June 2010, cross-border RMB trade settlement was allowed in 20 cities in the PRC. In July 2010, an agreement between the HKMA and the PBoC allowed banks to offer RMB accounts and RMB-denominated investment products to corporates and individuals, and provide RMB credit to corporates who could freely convert currency and transfer funds between accounts and eliminated any restrictions on issuer, investor or amount of RMB issuances.
The re-denomination of China trade into RMB (and settlement in Hong Kong); the migration of part of China deposits from onshore to offshore (due in part to the different exchange rates between the RMB offshore (“CNH”) and the RMB onshore (“CNY”) have pushed some brokers to estimate that the amount of RMB deposits in HK could reach 1-2 RMB trillion by 2012-13 and predict that Hong Kong is to become to the RMB what London is for the US Dollar (in fact, London’s originally small US$12bn of deposits in 1963 grew to US$3.6trillion today, almost half of the overall onshore US$-denominated deposits in the US).
The increase in the RMB deposit base, in turn, is driving growth in issuances of so called “dim sum bonds” (RMB bonds issued in the Hong Kong market): issuance volume went from US$1.2Bn in 2007 to US$2.3Bn in 2009 and 2010 promises to be even higher. Most interestingly, the issuer base (originally just the Chinese government and local financial institutions) has expanded to include supra-nationals (ADB has issued an RMB1.2Bn bond and IFC is rumoured to have already mandated banks), Chinese corporates (Sinotruck and China Resources recently issued dim sum bonds) and foreign corporates (McDonald’s and Hopewell).
As most issuers would want to remit the issuance proceeds onshore, the main advantage of dim sum bonds are the lower interest rate (compared to similar bonds issued onshore). Analysts also think it’s just a question of time before RMB-denominated IPOs or follow-on offering are executed on the SEHK. The stock exchange seems to have the infrastructure in place (including HK banking system tests for trading/clearing) and is focused to start executing business by 2011. This would strengthen Hong Kong’s role as an offshore RMB financial center by providing additional investment opportunities for the offshore RMB deposit base.
Over the medium term, the pace of the market development is still uncertain; however, in the best case scenario, HK would rapidly become a centre for offshore RMB akin to the London Eurodollar market and the successful creation of an RMB offshore market could be one of the last steps before the full liberalization of the RMB.