March 30, 2012 8:33 am

20Renminbi pauses for breather as GDP growth slows

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China’s growth story and the willingness to internationalise the currency has seen strong interest from investors for renminbi exposure to boost returns and portfolio diversification.

Recently a number of market commentators have said the short term outlook for the currency’s appreciation looks limited, but asset managers say investors should not be perturbed as the fundamental principles for investing in it remain in place.

The latest Chinese GDP figures from last year, of 8.9 per cent year on year growth, are down a bit from the previous 9.1 per cent but hardly a sign of a “hard landing”, says Michael Hasenstab, portfolio manager in the Franklin Templeton fixed income group.

Angus Hui, fund manager, Asian fixed income at Schroder Investment Management, says depreciation is unlikely.

“In our view this undermines efforts to internationalise the currency, and China needs to manage the political expectation from other countries. Overall, the renminbi is a rewarding currency in which to invest given its relatively low volatility.”

The renminbi has previously been problematic to access because of strict controls on it but since policy changes by the Chinese government in 2010 the capital markets are opening up

China continues to demonstrate a willingness to take steps toward unrestricting its currency and capital flows, says Mark Hogg, director, FX product development at RBC Dexia Investor Services.

“The renminbi foreign exchange market is thriving,” he says.

“Full liberalisation is likely to still be several years away, but we can expect a future where the renminbi is a globally traded reserve currency, commensurate with China’s status on the world economic stage.”

Currently, investors can gain access through onshore non-deliverable FX forwards, which have the advantage of being very liquid.

Peter Eerdmans, head of the emerging market debt team at Investec Asset Management, says the drawback is that the yield on the non-deliverable FX forwards is typically negative as currency appreciation is priced in.

A slightly higher yielding way to hold the currency is to take advantage of the offshore renminbi (CNH) market.

This is possible via deliverable FX forwards, which Mr Eerdmans says typically have paid slightly higher or less negative yields, “but are less liquid and require a local account to be set up”.

Neil Weller, director, fundamental fixed income team at BlackRock, says investors can also open a bank account denominated in renminbi and put money on deposit.

“This has been popular in Hong Kong and has been easy to access,” he says. “It is also possible to access from other regions such as London and New York, but deposit rates are quite low at around 1 per cent and it also leaves you with credit exposure to your bank.”

For investors that would prefer a higher yield, the offshore bond market – dubbed dim-sum bonds – provides this.

Mr Weller says investors can buy bonds directly or through a pooled vehicle. There have been a number of dim-sum bond funds launched by asset managers in the past year, including one launched by BlackRock.

Mr Weller says these funds have proven reasonably attractive. He says: “We feel funds are one of the better ways to access the market because you get the benefits of high quality credit research and a manager to do that security selection for you.”

Investors can also now access the onshore bond markets with the introduction of the renminbi qualified foreign institutional investor (RQFII) programme, which launched last September.

Quotas to invest in mostly onshore bonds were awarded to Chinese asset management companies based in Hong Kong and the first pooled funds were approved by Hong Kong’s Securities and Futures Commission in January.

The take-up of these funds has been low, however. Mr Weller says this is because they are run by “less well-known names”. Investors also prefer the offshore market as they feel more confident with the tax and legal systems in Hong Kong, he adds.

Geoffrey Lunt, director and senior product specialist for fixed income at HSBC Global Asset Management, says that while RQFII has not been widely popular it is just another step in broadening access to the Chinese bond markets.

“I would expect the RQFII scheme to be broadened at some point to allow more investors access to the onshore market,” he says.

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