Asset managers are keen to develop equity and fixed-income products to take advantage of liberalised rules regarding renminbi accounts in Hong Kong, but many questions remain.
The People's Bank of China (PBoC) and the Hong Kong Monetary Authority signed an agreement on July 19 to expand an existing trade-settlement scheme in renminbi, to further develop Hong Kong as a centre for the internationalisation of the currency.
According to the agreement, there will no longer be restrictions on banks in Hong Kong in establishing renminbi accounts for and providing related services to financial institutions. Furthermore, corporations will be able to conduct renminbi payments and transfers through these banks (to date, individuals can transfer up to Rmb20,000 at a time to renminbi accounts).
Hong Kong subsidiaries of brokers and fund managers will also be able to facilitate investments of renminbi deposits back into mainland capital markets, in a pilot scheme expected to begin by the end of this year.
The extent to which this attracts financial institutions participating in renminbi transactions in Hong Kong will determine what kind of RMB investment products can be produced. It will also determine to what extent this will represent a new way to access A-shares or renminbi bonds without having to obtain a qualified foreign institutional investor (QFII) licence. (The total quota allowed for the QFII scheme is $30 billion, and only half of that has been allocated.)
For example, RCM would like to develop such 'mini-QFII' products because there is interest among Hong Kong retail investors, says Mark Konyn, Asia chief executive.
Under the mini-QFII proposal, individuals can buy A-shares directly from subsidiaries of mainland securities firms. There are some Rmb80 billion of deposits held in Hong Kong banks and mini-QFII will initially be limited to Rmb10 billion compared to Rmb30 billion in issue under the main QFII scheme, says Konyn. This mini-QFII scheme will compete directly with any RMB-denominated mutual funds.
"While it's too early to be too precise about timing," says Konyn, "a key milestone is how the regulations in Hong Kong accommodate these latest announcements."
Unlike the QFII regime, which is ultimately denominated in US dollars, 'mini-QFII' funds must be priced and settled in renminbi. This means QFII quotas are not applicable.
Instead, fund managers expect to go through a parallel quota system, presumably also with multiple levels of approval, including the nod from the China Securities Regulatory Commission followed by a quota allotment from the PBoC.
The quota sizes may be determined by the degree of renminbi transactions that take place following the PBoC/HKMA agreement.
"It remains to be seen how much liquidity will be in the system, as well as the development of the renminbi debt capital raising activities in the market," says Michele Bang, CEO at Harvest Global Investments, a Hong Kong-based unit of Beijing-based Harvest Fund Management.
An important development is the opening of settlement to corporations, but questions remain as to what exactly this means, note fund managers. For example, will it be restricted to companies based in mainland China, or companies directly involved in trading with China, or also any multinational that wishes to transact in renminbi in Hong Kong?
Another factor may be the degree to which companies decide to issue debt in renminbi, and to what degree the major investment banks and brokers underwrite and trade such securities.
The depth of the renminbi market in Hong Kong will ultimately decide the depth of product that qualified asset managers can invest into, Bang notes.
Although a new channel to access A-shares will surely be welcomed by many global investors, the more significant product developments may be in fixed income.
Today, global investors are barred from accessing the RMB bond market, due to Chinese capital controls; there is only very limited exposure via the QFII regime, as Beijing intended this to just focus on equities. A 'mini-QFII' could allow global investors to freely trade in a renminbi market in Hong Kong, and thus spur the development of pan-Asian bond products.
Cecilia Chan, Asia-Pacific head of fixed income at HSBC Global Asset Management in Hong Kong (the Halbis wing, now rebranded as HSBC), is one manager who expresses interested in investing in these bonds. But she says there are some evolving issues that need further clarification before these instruments can become more popular.
For one thing, there is insufficient liquidity available for institutional accounts to buy a decent amount of renminbi, plus potential RMB bond issuers are concerned about whether they can bring the currency back to the mainland, says Chan.
"There are institutional accounts carrying RMB holdings, which would be keen to consider buying RMB bonds as cash alternative investments for potential yield pick-up," she adds. "Once these evolving issues are resolved, that will encourage more issuance."
Jame DiBiasio contributed to this story.