Financial centers slugging it out for piece of offshore yuan business

With the world's banks battling for a share of the global renminbi business, market leadership can't be taken for granted, reports Emma Dai in Hong Kong

The offshore yuan pie is expanding fast, but many cities want their slice of it, and Hong Kong must make greater efforts to maintain its position this year as the premier renminbi offshore center, analysts said.

It's facing intensifying competition from other financial centers, including London and Singapore.

Since 2007, when China began to internationalize its currency, offshore renminbi liquidity has ballooned to 1.2 trillion yuan ($198 billion). The yuan became the world's eighth most-used currency for trade settlement at the end of 2013.

With deposits of 827 billion yuan in its banking system, Hong Kong has gained a clear lead over other financial centers in attracting offshore yuan funds. Now it needs to increase investment channels, such as equity-linked notes, to maximize the deployment of those funds.

Banks in Hong Kong have called for policy support as they move to expand the yuan capital market by convincing more issuers from the mainland to raise long-term debt in the city.

The market for these dim sum bonds has certainly surged. Last year, total yuan bond issued offshore rose 12 percent to 137.4 billion yuan.

So far this year, issuers ranging from milk powder producers to property developers, insurers, banks and even sub-sovereign bodies have raised renminbi funds offshore.

For investors in these bonds, the return "was about 4 percent in 2013. For a Hong Kong- or US dollar-based investor, there was another 3 percent currency appreciation", said Cecilia Chan of the Asia-Pacific fixed income division of HSBC Global Asset Management (HK) Ltd. She said the yuan is expected to appreciate another 2 percent in 2014.

According to HSBC, the average maturity of offshore yuan bonds is 2.7 years. "That's quite short," said Chan, adding that the sector offers lower duration risk (which measures the price sensitivity of a financial asset to changes in interest rates) with good return.

"The past few months have been a busy time for dim sum bond issuers. We expect the momentum to continue on both the demand and supply side," Chan said. "As long as investors are willing to buy, there is no shortage of suppliers. Both Chinese and global names are welcomed."

Standard Chartered Bank Plc has forecast a big year for dim sum bonds in 2014. In a report published in January, the bank said: "We are constructive on dim sum bond market performance in the near term, as we expect the current loose (offshore yuan) liquidity conditions to continue for slightly longer.

"This is despite likely large supplies in the first quarter, driven by large refinancing needs and the widening onshore-offshore interest rate gap."