According to an article from Bloomberg last week, Chinese officials told EU chamber that the yuan will achieve “full convertibility” by 2015. The People’s Bank of China said on Aug. 1 it will manage the yuan more actively against a basket of currencies, instead of just the dollar, and allow market forces to play a greater role.
Yuan has been in great demand in recent years as investors have started to lose confidence in Euro and USD which were the dominant trading currencies in the past. China has accelerated the use of the yuan in international trade, and took several steps. China’s announcement to launch yuan foreign-exchange options is another significant move.
With US deficit and Euro Debt Crisis, there are many talks that Yuan will be the next safe haven. Yuan products have bloomed especially since last year. However, investors must be wary of the products offered in the market. Given the current yuan restriction, many are CNH products, which are more complicated and less liquid (wider spread).
In addition, many investors buy yuan products because they were sold the idea of potential yuan appreciation. Though CNY has appreciated against USD. The chart below shows that SGD has in fact appreciated faster than CNY in the past two years.
SGD/CNY as Sep 18,2011 (source: Yahoo Finance)
Chinese authorities recently announced that a third Renminbi clearing bank would be established in Singapore after BoC (HK) and BoC (Macau). This would provide an important foundational element for an eventual offshore RMB trading platform as it would allow local banks to deposit RMB reserves locally and facilitate cross-border RMB trade settlements- both of which currently require the use of a Hong Kong platform.
The developments also indicate that Singapore will be the first jurisdiction outside of Hong Kong to see the offshore deliverable RMB market exparenmimbi and offshore renmimbi market regime currently in place in Hong Kong, rather than create separate competing systems as this is already freely transferrable offshore.”
Since inception last August, the pace of organic growth of the CNH market has been rapid and sustained. The CNH deposit base grew at a 251% annualized pace, to over CNH 450 bn by the end of March, putting it on track to reach CNH800 bn – 1.2 trn by year end.
Liquidity has grown at a 27% monthly pace with spot USD-CNH seeing around USD1 bn daily turnover. It is expected to eclipse the non-deliverable forward (NDF) market in liquidity in the coming few years as the overall deposit base of CNH increases.
Cross-border trade settlement reached RMB 360bn, or 7% of total trade in the first quarter of 2011, having grown from 5% in the final quarter of 2010 and gross bond issuance has clocked RMB 48 bn in 68 issues this year, surpassing 2010’s issuance.
Singapore investors benefit from this move. Since second half of last year. I’ve seen many RMB related products launched. Many fund houses started to launch RMB dominated funds.
The other big growth area is CNH Bond Market. While most of the products were only available to Accredited Investors, UOB has opened doors to retail investors with their United RMB Bond Fund
Recently, there is growing interest in RMB Deposits or Bonds. Investor should pay attention to this new market development but remain cautious and vigilant. if in doubt, please contact your financial adviser.
Last week, the market was caught off guard by the People’s of China’s (PBOC) lowering of the offshore RMB (CNH) deposit rate in Hong Kong to 0.72% from 0.99%, effective from 1 April.
Previously, banks in Hong Kong were constrained by their credit limits in placing deposits with Bank of China, which is the sole CNH clearing bank. As a result, banks have been buyers of bank papers even at yields lower than deposit rates of ~0.8%. Under the new policy, lenders involved in CNH settlement in Hong Kong are allowed to deposit the currency in a special account with China’s central bank, which means banks will face PBOC directly.
In the short term, we expect the move to result in short-dated bond yields correcting up toward the deposit rate, which will be generally positive for CNH bonds, except for bonds that are currently trading below the deposit rate.
Wall Street Journal —China will launch domestic trading of yuan options against other currencies in Apr, a significant move that signals Beijing’s intention to tolerate a more flexible and volatile currency and further internationalize the yuan.
The State Administration of Foreign Exchange, China’s foreign-exchange regulator, said in a statement Wednesday that it will initially launch trading of so-called European-style yuan options on the interbank market. Businesses will be allowed to buy call and put options from banks, it said, but not to sell them unless they are squaring positions, which means they are bringing their buy and sell positions equal.
China Yuan has become increasing popular due to its booming economy and appreciation of the currency. The yuan had risen 3.7% against the U.S. dollar since June, many investors want to go into the market but are much restricted.
Recently DBS Launches Yuan Products, but investors must be wary on the risks of investing in their Yuan product. According to LionInvestor :
The offshore yuan (CNH) is actually less liquid compared to the onshore Renminbi (CNY) and investors could be investing at very wide spreads.
If you are considering investing in a Yuan product (or any other foreign currency fixed deposit for that matter), always compare the spread and not only the interest rates that the bank is offering you.
With CNH spreads going up to as wide as 8%, you will need to be a long term investor to reap the benefits of Yuan appreciation.