Rapid rise in RMB deposits in HK drives optimism

The level of RMB deposits in Hong Kong leaped by Rmb60 billion in just over a month last year. HSBC Securities Services is among those excited about the emergence of a new asset class.

Surging renminbi deposits and rampant investor demand suggests 2011 will be a promising year for Hong Kong as it strives to develop as an offshore RMB centre, says HSBC Securities Services (HSS).

Ian Banks, Asia-Pacific head of HSS, points to a rapid increase in RMB products that have become available in the past few months alone.

The latest statistics from the Hong Kong Monetary Authority put the total for RMB deposits in the city at Rmb280 billion ($42 billion) at the end of November last year, a staggering Rmb60 billion increase from the month before. The overall figure stood at just Rmb60 billion at the end of 2009.

There is Rmb54 billion outstanding in dim-sum bonds (renminbi-denominated bonds in Hong Kong), including Rmb14 billion issued by the Chinese government and Rmb40 billion by banks and corporates, including McDonald’s, Caterpillar and Hopewell.

On January 5 this year the World Bank issued its first RMB-denominated bond in Hong Kong, a Rmb500 million issue with a two-year maturity.

“RMB itself will become a new asset class over a period of time given its potential size, opportunities and the level of investor interest,” says Lillian Wong, Asia-Pacific head of fund services at HSS.

“As a fund administrator, we have seen our clients excited and keen to learn about RMB products and looking for ways to snap up the [investment] opportunities.”

She notes strong interest among asset management companies that want to launch RMB fixed-income funds or direct some of their RMB allocation into RMB assets.

Foreign portfolio investors who believe in RMB appreciation and securities with exposure to China have also been boosting demand for RMB products in Hong Kong, notes Dariusz Kowalczyk, senior economist and strategist for Credit Agricole CIB, especially given that onshore mainland portfolio investments are now limited to the highly restrictive QFII programme.

“From what we see, there is certainly more demand than supply [of RMB products in Hong Kong],” he says, noting that the size of investable RMB assets – mainly deposits and bonds for the time being – is still small.

The limited market size of offshore RMB bonds also concerns Wong. “Fundraising for RMB-related funds has been very successful, but our next question is how are fund managers going to invest the money and deliver returns for their investors.”

That said, Wong remains optimistic about the growth of the RMB bond market. “It’s just a matter of time,” he says. “You just need to let it grow. Corporates were only allowed to issue RMB bonds in the third quarter last year.”

Kowalczyk expects RMB bond issuance in Hong Kong to climb to Rmb80 billion in 2011, almost double the present size, and RMB-denominated equity offerings are also likely to make their debut in Hong Kong this year.

Cheung Kong (Holdings) announced on December 22 last year that it planned to launch an RMB-denominated real estate investment trust in Hong Kong in the first half of 2011, which is expected to become the first RMB IPO in Hong Kong.

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