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February 28, 2013 11:52 am
When Taiwan’s President Ma Ying-jeou was a child, the streets echoed with the government’s pledge to eliminate China’s leader Mao Zedong and reconquer mainland China.
Now, Mao can be seen again in Taiwan, not on political posters, but on new adverts for retail savings accounts in renminbi, featuring the late communist ruler’s face.
Taiwan is now the second major market after Hong Kong able to clear renminbi as China slowly internationalises its currency. Although Taiwan’s capital, Taipei, is not a gleaming hub of finance, the island is China’s fifth largest trade partner, and thousands of local companies, both large and small, work throughout the mainland.
Initial appetite for renminbi has been voracious, with over Rmb1.3bn ($209m) going into retail accounts on the first day Taiwanese banks began accepting deposits earlier this month.
“Definitely Taiwan will be a huge market for renminbi. A lot of Taiwanese companies are doing real business in renminbi,” says Massimo Guiati, chief investment officer at An Zhong Investment Management in Hong Kong. He expects Taiwanese renminbi deposits to reach Rmb250bn-Rmb300bn in the next two to three years, an important new pool of liquidity at a time when renminbi deposit growth in Hong Kong has stalled.
Renminbi traded in Taiwan will go by the name CNT, as opposed to Hong Kong’s CNH and CNY, the onshore renminbi.
Investable assets are also in the works. This week Chinatrust sold Taiwan’s first offshore renminbi bond, dubbed a “renminbi Formosa bond”, after the island’s former name. The bank’s Rmb1bn note, which matures in 2016, sold at 2.9 per cent, compared with an average for renminbi bonds in Hong Kong of 3.9 per cent, as measured by Bank of China.
While the Taiwanese market is likely to be far more domestically driven than that of Hong Kong, analysts say it could have an important role in the global market for offshore renminbi bonds, and breathe new life into China’s currency project.
Currently, renminbi bonds issued in Hong Kong, known as “dim sum” bonds, are almost exclusively short in tenor. As many issuers opt to raise money in renminbi and transfer those funds back into US dollars, the maximum maturity is restricted by the liquidity in the currency swap market. A lack of clarity on when China might liberalise its capital account and provide international investors with greater access to onshore assets has also kept the typical duration to just two or three years.
However, the addition of Taiwan’s market, thanks to the longer-term investment needs of its large insurance industry, could change that. Analysts say that borrowers tapping into Taipei’s offshore market may be able to hit much longer tenors, such as 10 or 15 years. Taiwanese companies are also more likely to use the renminbi for investment rather than swap it.
“Most Taiwanese corporations will probably prefer to use the renminbi if they want to make any foreign direct investments. I suspect most of them will have a real use for the renminbi rather than just use it as a funding currency,” says Linan Liu, greater China rates strategist at Deutsche Bank.
Yields on renminbi bonds are expected to be higher than in Taiwan’s local currency market, as has been the case in Hong Kong. While that should be tempting for Taiwanese investors, it may prove a stumbling block for local issuers.
“The key challenge you will face is whether or not people want to or need this high-cost funding or [if they will] borrow Taiwan dollars, which is cheaper,” says Jerry Yang, a Taiwan banks analyst with Daiwa Securities.
Restrictions on how Taiwanese companies can invest their proceeds onshore will also be a problem for those looking to borrow in renminbi, says Peter Kurz, head of Taiwan research at Citi.
Growth in Hong Kong’s offshore renminbi debt market slowed in 2012, with both deposits and dim sum bond issuance falling.
Aside from adding a fresh source of renminbi liquidity, the move to make Taiwan the second offshore centre for renminbi is part of a much broader effort by Mr Ma and the Beijing government to stabilise relations and deepen economic ties following decades of political dispute.
But the pace of renminbi internationalisation also appears to be picking up. Earlier this month, Singapore became the third location to have a bank appointed to handle renminbi clearing, while the Bank of England and the People’s Bank of China last week said they were in talks to set up a currency swap line between the UK and China.
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