Not enough RMB bonds to satisfy demand, says BCT

Custodians and fund-admin providers are ready to tap potential opportunities in the renminbi funds market, but worry that RMB bonds are thin on the ground.

Banks have readied their custody, cash and fund-administration operations in Hong Kong and China to accommodate an expected boom in renminbi-denominated funds, following the further easing of rules on RMB settlement in Hong Kong.However, it seems there may not be enough RMB bonds to go around for the time being.

"Despite increasing market demand for these types of funds, the number of RMB bonds is limited," says Lau Ka-Shi, chief executive of MPF services provider Bank Consortium Trust (BCT) in Hong Kong. "There are now 20 RMB bonds available in the market, which is definitely not sufficient for setting up a RMB bond fund, which normally requires 40-50 holdings."

"We wish to see further launching of RMB bonds in Hong Kong and hence more room for developing the RMB-denominated fund market," she says.

Most existing MPF funds invest in Hong Kong dollars or US dollars, but renminbi products will provide more options, says Lau. As a fund administrator, BCT already caters for multi-currency investments and can administer RMB-denominated funds, she adds.

The offshore RMB market will be dominated by Greater China players, says Scott McLaren, managing director of RBC Dexia Investor Services in Hong Kong. “RMB products will most certainly garner a great deal of interest globally, and I expect we should see rapid evolution in these types of products, which bodes well for the Hong Kong funds industry and players,” he says.

It is early days for RMB funds; for example, only one retail fund has launched so far this year in Hong Kong, the Haitong Global RMB Fixed Income Fund from Shanghai-based Haitong Asset Management, last month.

But there has been interest, largely generated by the recent easing of rules so that Hong Kong entities can issue RMB-denominated bonds.

There have been several bond issuances, and the next development in the natural evolution process is the launch of RMB-denominated funds to invest in these bond issues, says Shaun Parkes, head of worldwide securities servicing for Asia ex-Japan, JP Morgan.

“This is what we are now observing,” he says. “I do know this is on the radar for a number of other managers in Hong Kong.” Both bond issuance and the number of fund launches are likely to rise fast, he adds.

Fund managers reported as keen to develop renminbi products include Harvest, HSBC, RCM, MFC Global Investment Management and Aberdeen Asset Management.

Furthermore, due to the significant balances of RMB in Hong Kong, Parkes expects these funds to prove very popular with retail and institutional clients. Such funds will provide a vehicle to put their money to work, he says.

In parallel, adds Parkes, there is a growing interest in the ‘mini QFII’ or ‘QFII-lite’ programme that will allow mainland firms with Hong Kong subsidiaries to invest directly in China A-shares. “Again, this is still in the very early developmental stage, although we expect guidance on the process by the end of 2010,” he says.

Both regulatory changes are aimed at providing offshore RMB holders with further investment opportunities and are expected to generate a great deal of interest.

“This is an exciting time for Hong Kong and its development as an offshore renminbi centre,” says Parkes, adding that JP Morgan welcomes the changes and sees them as opportunities for business development.

Banks provide custodian, cash and fund-administration services related to RMB bonds and associated funds. “It is something we are ready and able to do today and something JP Morgan will continue to develop as the market evolves,” Parkes says.

The Chinese authorities have introduced various measures to liberalise renminbi trading following the announcement on the de-pegging of the RMB from the dollar.

In July, the People’s Bank of China (PBoC) and the Hong Kong Monetary Authority signed an agreement to expand an existing RMB trade-settlement scheme. It is aimed at developing Hong Kong as a centre for the internationalisation of the currency.

And, in mid-August, the PBoC announced a pilot scheme whereby banks participating in RMB business in Hong Kong can conduct trading in the mainland’s interbank bond market on approval by the central bank. 

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