Breaking into the renminbi

In Asia in general, fixed income is becoming an increasingly important and interesting asset class.

The region exhibits very positive fundamentals for credit compared to those in many other parts of the world.

In particular, China’s economic growth has understandably led to a wave of interest from international fixed income investors. Accessing Chinese bonds is, however, not necessarily straightforward.

Although China is a fast-moving and confusing environment, the good news is that the country’s capital markets are opening up, which is creating new opportunities for investors. Chinese economic potential may be held back in the coming decades if the rules regarding the use of the renminbi remain restrictive. The current regime means China is not only investing its vast – and mainly dollar-based – currency reserves in low yielding, depreciating assets, but also that Chinese exporters are exposed to a substantial foreign exchange risk as they are unable to receive payment in their own currency.

The Chinese authorities have started to allow a limited amount of the currency to be used offshore for various purposes, including settling trades and investing in the fledgling offshore bond market. Their ultimate goal is to make the currency fully convertible. At that point, the renminbi is likely to become a major global trading, investment and reserve currency. However, this is likely to be a process which takes at least five to 10 years.

In the meantime, there are two markets for the renminbi, one onshore and one offshore. Because there are two markets, the two currencies trade at slightly different exchange rates and substantially different short-term and long-term interest rates.

At this point, it’s probably worth talking about some of the naming conventions, which can be confusing in themselves. Offshore renminbi is often referred to as ‘CNH’ – the ‘H’ is for Hong Kong, where the currency is deliverable and the vast majority of offshore renminbi business occurs.

‘CNY’ is the shorthand used for the onshore currency, but this is also the conventional code for the Chinese yuan as a whole entity. These codes have no official status. Therefore, it is preferable in this instance to use ‘offshore renminbi’ and ‘onshore renminbi’, using ‘RMB’ to describe the Chinese currency as a whole.

The onshore bond market is now approximately RMB20trn (£1.97trn) in size. As such, it is a highly liquid market with more than 2,300 bonds, turnover of RMB68trn a year and more than 10,000 institutional investors.

The onshore market was, until a few years ago, heavily dominated by government and government-related issuance, but corporate bonds are now making up a greater proportion. The onshore market is primarily a domestic market and there are tight restrictions on foreign investment. However, it is quite freely accessible to onshore entities.