Renminbi bonds ‘good in spite of appreciation prospects’

Since a revaluation of the US dollar/renminbi (RMB) exchange rate in 2005, the latter has increased 24 per cent and also shown relatively low volatility.

According to Mr Hui, near-term expectations for RMB strengthening have reduced in recent months, reflecting China’s more balanced trade position and suggestions from the central bank that the currency is no longer significantly undervalued.

“From a cyclical standpoint, the slowdown of Chinese economies and lower inflation expectations suggest the pace of RMB growth against the US dollar should slow down,” he added.

“Having said that, persistent depreciation is unlikely as this undermines efforts to internationalise the currency. Capital tends to go to where growth is stronger and fiscal balances more robust. With China’s healthy fiscal position, the RMB offers investors, such as reserve managers and institutional investors, an alternative source of value.”

Mr Hui said a stronger currency would also be conducive to China’s structural changes in the medium term by encouraging growth in consumption, critical to addressing structural imbalances as well as helping contain inflationary pressures.

From the view of the offshore RMB bond market, reduced expectations for currency appreciation are a healthy development, according to Schroders.

Expectations of continued RMB growth was one of the key reasons the so-called dim-sum bond market took off in 2010 and investors were willing to accept lower yields as a result.