HSBC Global Asset Management gave a dim sum lunch presentation in London on Monday 21 November, during which the firm gave a positive review of the Chinese offshore RMB bond market and outlined the macro reasons for investing there.
Three key members of the team were in attendance, namely: Joanna Munro (pictured), Chief Executive, Asia Pacific HSBC Global Asset Management; Philip Poole, Global Head of Macro & Investment Strategy, and Geoff Lunt, Investment Director, Asian Fixed Income.
The overriding message that came out of the presentation was the huge potential that RMB bonds offer to investors, not just because of the attractive yields (3.6 per cent on average), but also because of the appreciation potential of the RMB.
As Munroe explained, the RMB market is “the most astonishing growth story. The CNH market (offshore RMB market located in Hong Kong) has grown from RMB35billion at the end of 2010 to RMB203billion. We expect to have in excess of USD10billion in AUM in our onshore and offshore RMB products within the next five years.”
China’s GDP growth is expected to soften from around 9.4 per cent this year to 9.2 per cent in 2012 say experts, although HSBC Global Research forecasts GDP growth to be 8.6 per cent. Credit tightening has helped cool the economy as it battles inflation with PBoC, the country’s central bank, having already raised interest rates three times. This has helped inflation come down from a three-year high of 6.5 per cent in July this year to 5.5 per cent in October.
Poole, outlining the macro drivers at work in China, said that inflation and growth had been conflicting priorities for the Chinese government and central bank, noting that if anything “the economy has been growing too rapidly”. “Dealing with inflation has been a policy priority for at least the last 18 months. Credit growth is slowing to a more normal rate but we at HSBC GAM do not believe that China will suffer a hard landing heading into 2012,” commented Poole.
Perhaps critically, China’s property markets are also showing signs of cooling off and this will also help keep inflation in check. Property prices for the 70 largest cities have fallen from above 10 per cent in 2010 to around 5 per cent in 2011. And of course, the mainland’s currency itself, long the source of much ire from US authorities for being too undervalued, is expected to continue its long march of appreciation. Having de-pegged the RMB in July 2008 in response to the global credit crisis, where it remained at 6.82 until the summer of 2010, China’s currency has since appreciated to a current value of 6.36.
Poole admitted that the RMB remained massively undervalued in real terms. “It has the potential to appreciate strongly over time to anywhere between 2.5 and 4 to the dollar rather than 6.36 currently,” he said, observing the very obvious anomaly in that despite China’s enormous economic growth, its currency had, so far, played a small role.
Continued infrastructure projects and public housing forecast to grow from 500million square meters in 2011 to just over 600million square meters are also expected to support economic growth next year. Moreover, China’s exports are becoming more diversified and importantly, becoming less dependent on the US. Any risk to a US recession will hit the likes of Mexico much harder, whose exports to the US represent 80 per cent of the country’s total volume. China’s, by comparison, is a reasonable 17.9 per cent.
The days of the RMB becoming a reserve currency are still some time away but as Poole observed: “It’ll depend on the development of a deep, liquid bond market and we’re definitely heading in that direction.”
Shedding light on the RMB market, Lunt said that Hong Kong’s dim sum bond market really took off June last year on the back of favourable legislation which made it more desirable for foreign companies to issue RMB bonds. The market is actually two-tiered: CNY is the onshore market, which remains closed to outside investors, and the CNH market. Consequently, it is subject to two sets of demand-supply conditions and uses two different sets of interest rates, exchange rates and yield curves.
At RMB203billion, the offshore market remains relatively small compared to the CNY market, which currently stands at USD2.4trillion and as Lunt rightly pointed out: “It’s not difficult to see that we’re on the verge of having one of the most important capital markets in the world.” HSBC expects gross issuance of RMB260-310billion next year, growing to RMB400-450billion by end-2012.
Lunt said that bond yields had risen from around 2 per cent to 3.5 per cent this year. Demand outstripped supply early in the year, keeping bond yields low, but by September investor risk aversion and stronger than expected issuance had pushed up yields.
“The markets have remained orderly and that’s encouraging as it has now been stress tested,” said Lunt.
China’s currency is the key to the success of its CNH market. Provided it appreciates to the extent experts forecast, coupled with compelling macro evidence for continued economic growth, dim sum bonds could become an important product for European investors.
HSBC currently offers three RMB products. These include: HGIT RMB Bond Fund, a Cayman vehicle launched February 2011; HSBC Jintrust RMB Money Market Fund, launched October 2011; and HSBC GIF RMB Fixed Income Fund, also launched October 2011
