ICBC-Credit Suisse Asset Management (HK) has told AsianInvestor about its plans to launch a renminbi-denominated money-market fund in Hong Kong this year.
Originally the firm said it would be the first such product. However, HFT Investment Management actually launched the first RQFII money-market fund last April, as reported.
Clearly there are a lack of cash management tools for the Chinese currency in Hong Kong, forcing investors to convert renminbi holdings into other currencies when they leave the mainland market and park their money in low-liquidity time-deposit savings accounts.
But such instruments are not expected to proliferate because of the difficulty in manufacturing RMB cash management tools that meet international standards and which have a large enough currency quota in place.
ICBC-Credit Suisse AM (HK) revealed it plans to launch two MMF funds using the renminbi qualified foreign institutional investors (RQFII) scheme. One will be domiciled in Hong Kong, the other in Luxembourg as a Ucits fund.
These will be vanilla funds investing in onshore tradeable ultra-short bonds via RQFII, but will not invest in Chinese banks’ negotiated cash deposits or leveraged instruments.
Richard Tang, chief executive of ICBC Credit Suisse AM (HK), said the MMFs would target retail and institutional investors looking for RMB cash management instruments.
The firm, a joint-venture overseas subsidiary of ICBC-Credit Suisse AM, does not yet have a confirmed launch date for the funds.
Hong Kong is the world’s largest offshore renminbi trading hub with Rmb1 trillion ($160 billion) in savings as at the end of 2014. But Tang pointed to a lack of cash management tools available for the currency outside of renminbi bonds, equity funds and exchange-traded funds.
“Since there’s no renminbi cash management tools in Hong Kong today, most managers have to convert their holdings into dollars or Hong Kong dollars when they exit the China onshore market,” Tang said.
He suggested this was holding back RMB internationalisation in Hong Kong, given the lack of appropriate tools to bridge such a gap.
Tang said most renminbi holders in the city had little choice but to use time-deposit savings accounts at Hong Kong commercial banks, which provided poor liquidity and interest rates.
An executive at a Chinese fund manager’s Hong Kong arm stressed that for institutional investors the liquidity factor would be key when it came to renminbi MMFs, but that such funds would also need to compete with time-deposit accounts at a retail level.
Hong Kong commercial banks’ time deposit rates vary, but HSBC and Bank of East Asia are offering annualised rates of between 3.2% to 3.8% for new deposits of renminbi in a three-month lock-up period. ICBC-Credit Suisse AM has not yet set a rate for its upcoming MMF.
But by way of comparison, Yu’E Bao, the hit Chinese online MMF, was offering a seven-day annualised interest rate of 4.5% as of last Tuesday, while the China onshore one-year government bond was yielding 3.48%.
Yu’E Bao (“leftover treasure") was launched by Tianhong Asset Management and e-commerce giant Alibaba in June 2013. Thanks to its popularity, Tianhong became the biggest fund house in China in terms of AUM, although its profitability is lower than the number two player ChinaAMC.
Another challenge for renminbi MMFs in Hong Kong will be to differentiate from onshore China peers. One executive noted that setting up an offshore renminbi MMF in Hong Kong would not be easy because a large RQFII quota would be needed and the fund would be unable to invest in onshore negotiated cash deposits. He stressed his firm did not have plans to launch such an MMF.
Tang conceded that one difficulty in manufacturing an RQFII MMF was to meet foreign investor demands for cash management tools that are in line with international standards.
China’s onshore MMFs are different from international peers since most have 70% of their holdings in negotiated cash deposits, which are short-term, bespoke arrangements between banks and fund houses.
Tang pointed out that because negotiated cash deposits were not tradeable in China, such onshore MMFs were not considered acceptable cash management tools by foreign investors used to international standards.
ICBC Credit Suisse AM is the third-largest fund house in China with AUM of Rmb255 billion at the end of 2014. It is one of the top three bond managers in China. Its Hong Kong subsidiary was established in 2011 and held Rmb2.8 billion in RQFII quota as of the end of last year.