Offshore trading in Chinese Yuan currency – Does it benefit investors?

Offshore trading of the Chinese Yuan currency has received quite an overwhelming response for many foreign exchange traders recently with the announcement on May 27, 2013 that the Industrial & Commercial Bank of China (ICBC) has come into an agreement with Singapore’s Monetary Authority of Singapore (MAS) to kickstart its Yuan clearing service, with prominent British bank, including HSBC Plc participating in the offshore Chinese Yuan trading through a debt capital raising exercise with a two-year fixed rate bond to raise 500.0 million Chinese Yuan or SGD 102.9 million. This was followed by another British lender, Standard Chartered raising one billion Chinese Yuan via a three-year bond. Two days later, on Wednesday, May 29, 2013, one of the Singapore’s largest banks, DBS Bank Holdings participated in the offshore Yuan market through a three-year 500.0 million Yuan debt raising exercise. All the three debt issues by HSBC, Standard Chartered, and DBS Bank Holdings received overwhelming bids, which ICBC Bank, acting as a clearing agent, managed to complete most of the transactions in a single day.

The local financial institutions in Singapore have been active supporters and participants in the establishment of the offshore Chinese Yuan currency trading market. The Singapore Exchange (SGX) has also lent a hand by launching a depository service for Yuan bonds. These events have bode well for much of the interest shown in offshore Chinese Yuan trading activities. According to a Barclays Plc report, and was quoted in a Singapore Straits Times newspaper article published on Monday, June 03, 2013, that the recent moves by ICBC to act as a clearing agent for offshore Yuan trading offers Singapore an unique opportunity to promote the use of Chinese Yuan currency between China and Asean, which according to the news article, is the mainland’s third largest trading partner, and as a bloc, accounting for approximately US 400.0 billion (SGD 500.0 billion), or 10 percent, of its total trades. These various developments are a positive step in the development of Yuan products, given the growing interest among fund managers, and active investors who are actively investing in mainland assets.

In a article published on May 31, 2013, it was reported that the recent Chinese Yuan currency rally has driven a rally in the so-called ‘Dim Sum’ (offshore Chinese Yuan currency deposits) corporate bonds, reducing the yield premium during the month of May by the most in eight months. According to Bloomberg, the average yield on investment-grade corporate bonds declined seven basis points (bps) during May to approximately 3.176 percent on May 29, the least since November 2011, according to an index compiled by HSBC Holdings Plc. The spread over offshore government debt fell approximately 12.0 bps in May, the most since September 2012, to 86.0. On the other hand, yields on investment-grade debt climbed 27.0 bps in emerging markets and increased 25.0 bps in Asia, according to Bank of America Merrill Lynch indexes. It was reported that the People’s Bank of China said in April 2013 that the Central Bank authorities will widen the Chinese Yuan currency band moves “in the near future”, while Premier Li Keqiang said in May that the government will propose plans this year (FY 2013) for capital account convertibility.

The various developments in creating offshore Chinese Yuan trading facilities do offer many opportunities for fund managers, and local investors to participate in. In the past, there has always been a limit of capital flows in and out of the mainland, but these developments are a sign that China has realised that in order to establish itself as a global financial and trading hub, economic reforms are necessarily to create the necessary conditions for doing business in China. Through the establishment of the offshore Chinese Yuan market, traders, merchants, entrepreneurs both in the mainland and abroad will find it easier when conducting foreign exchange conversions, and minimise the consummation period of the business deal.

For retail investors, there are opportunities for them to invest in Chinese Yuan deposits. In fact, according to the Straits Times article, the initial demand for Chinese Yuan deposits was overwhelming, especially across the Straits of Taiwan. The article mentioned that in February 2013, Taiwanese banks received approximately 1.3 billion Chinese Yuan denominated deposits on the first day of these banks started to accept Chinese Yuan deposits, following the establishment of a Yuan clearing hub in Taipei (capital city of Taiwan).

The potential risks of such frenzy among foreign investors on the offshore Chinese Yuan trading activities include sudden change of China’s economic policies, and the current strict capital controls, which limits the amount of foreign flows in and out of the mainland. This issue has somewhat been mitigated recently as Chinese lawmakers have created a special class of qualified investments for foreigners seeking to invest in the country. There are also risks regarding its shadow banking system, where investors are resorting to informal means of conducting foreign exchange transactions. However, with the gradual establishment of the offshore Chinese Yuan trading, the issue of shadow banking might have taken to the backseat temporarily, but I believe that the issue of the continued existence of the shadow banking system will persist as corruption among local and state officials has not been eradicated completely. This includes the underground economy that is thriving despite the ongoing signs of the weakness in the Chinese economy which is estimated by the International Monetary Fund (IMF) to grow by approximately 7.75% for this year (FY 2013).

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc