Institutions 'too wedded to RMB appreciation'

Asset managers and asset owners are still too wedded to the prospect of currency appreciation as a driver for investing in offshore RMB products, says State Street.

In a survey of 200 institutions – split evenly between firms headquartered in mainland China and those elsewhere – 62% of Chinese respondents and 39% of non-Chinese cited appreciation as their chief reason for exposure to the offshore RMB market.

Second most popular was capitalising on arbitrage opportunities between the onshore CNY and the offshore CNH markets, as voted by 49% of Chinese IIs and 32% of non-Chinese IIs.

But Jeremy Armitage, Asia-Pacific head of sales trading and research at State Street Bank and Trust, argues they need to move away from “putting RMB in very specific little bucket where you can put 2-3% in portfolio and just ignore it”.

What they are not doing, he suggests, is thinking about the renminbi as they would a free-floating currency such as yen, euros or Aussie dollars. As China moves along the path of currency liberalisation, this is how their thought process needs to evolve.

In other words, he believes they are not looking far enough ahead. Asked what reforms they expected within the next three years, only 31% of Chinese respondents and 43% of non-Chinese thought the RMB would be freely floated, the survey found.

When it comes to opportunities in the offshore RMB market, 48% of Chinese respondents pointed to serving domestic high-net-worth individuals with assets abroad. The figure was 34% for non-Chinese.

“This reflects the extent to which Chinese investors have been underserved by current CNH investment and repatriation options such as dim-sum bonds or RQFII,” writes the report.

In terms of investment strategy over the next 12 months, the two sets of survey participants gave divergent views. China-based respondents were most interested in equities, both onshore and offshore markets. Some 40% of Chinese institutions want to increase their equities exposure and 30% target increased ETF exposure.

Chinese investors show less interest in offshore derivatives, with 43% saying exposures would not change in the coming year.

Non-Chinese respondents, meanwhile, were most interested in central government bonds. Almost 30% said they wanted to raise their exposure in the next 12 months, but showed less interest in ETFs with only 20% planning to increase allocation.

At the same time, more than 30% of non-Chinese respondents said they wanted to raise exposure to offshore derivatives, while only 10% said the same for the onshore market.

But their demand for access to onshore securities remains strong, with 52% saying they would apply for qualified foreign institutional investor (QFII) quota and 42% for Renminbi-denominated QFII in the next 12 months.

The survey, released by the Economist Intelligence Unit and commissioned by State Street Corporation, covered 200 institutions with AUMs ranging from less than $1 billion to more than $50 billion.

Asset managers made up 42% of respondents, with the remainder split mostly between insurance firms (19%), government pension plan sponsor (11%), corporate pension plan sponsor (9%) and sovereign wealth fund (7%).