CNH Tracker-Plodding toward internationalising the yuan

By Saikat Chatterjee

HONG KONG, June 23 (Reuters) - China may have taken two
steps forward but one step back in recent weeks as it works
toward its goal of internationalising the yuan.

The People's Bank of China issued a reminder to foreign
banks earlier this month, which was made public last week,
urging them to tighten checks on clients' offshore yuan
transactions to ensure any trading of the currency is backed by
actual goods and services trade or business needs.

In other words, China was saying don't speculate in the
offshore yuan (CNH) market.

Even though most of the PBOC's circular was a reiteration of
known rules, the timing of the release was significant, as it
came at a time when the growth of the market was accelerating.

A Reuters story on Monday revealed that Chinese regulators
have been indeed working behind the scenes to tighten control of
the CNH market through derivatives regulation and financial
bureaucracy.

But separating speculation and the use of currencies for
business transactions is easier said than done in the foreign
exchange market.

Since a landmark change in rules a year ago allowed the
offshore yuan market to flourish in Hong Kong, the puzzle of how
to boost the Chinese currency's use in global trade without
allowing speculative inflows to swamp its underdeveloped markets
has bedeviled Beijing.

China has strictly controlled the flow of yuan across its
borders, confining remittances largely to trade and working
capital purposes, but it has hitherto done little to restrict
its yuan capital movement outside the mainland.

The rapid growth in yuan deposits in Hong Kong, which has
far outpaced the growth of yuan-denominated assets, may have
taken Chinese authorities by surprise. And so this week's news
may mark the peak in yuan deposit growth, for now.

That does not mean that China has lost interest in the
offshore yuan market.

On the contrary, in a nod towards the problems faced by
companies in remitting yuan, the PBOC provided guidelines for
the very first time on yuan-denominated inbound foreign direct
investment, which according to some bankers can be also extended
to repatriation of "dim sum" bond proceeds.

Meantime, the only other existing avenue to raise funds in
the CNH market seized up briefly, in the form of bonds or "dim
sum" as they are colorfully known.

The issuance pipeline for offshore yuan debt, or dim sum
bonds, ground to a halt last week after a Hong Kong-based
short-seller Muddy Waters accused Toronto-listed Sino-Forest
of exaggerating the size of its forestry assets,
spooking investors with regard to Chinese credit.

It took Fonterra Co-operative Group, New Zealand's biggest
company, to crack open the market again with a 300 million yuan
bond offer that received blockbuster demand.

The ultimate objective for Chinese authorities is to see the
circulation of yuan pick-up outside its borders, David Wong,
deputy chief executive of the Bank of China Hong Kong
said at a seminar last Friday.

But for that to happen, the documentation process for
remitting yuan must be streamlined and market imperfections
ironed out, he said from his perch as the second most powerful
banker at the territory's only yuan clearing bank.

"Regulators on both sides of the straits are working hard on
this. We should see something evolve soon," Wong told Reuters.

Players in the market are keeping their fingers crossed.

WEEK IN REVIEW:

* High grade, high demand. Fonterra's dim sum bond was
priced at 1.1 percent after initial guidance of 1.2 percent, and
the final order book at 1.75 billion yuan was almost 5 times
oversubscribed. It was well supported by real money demand among
40 accounts.

* Bank of China Hong Kong is interested in offering yuan
clearing facilities in Singapore, which is keen to become an
offshore trading hub. When asked about the bank's plans, David
Wong, deputy chief executive of the bank, said: "We would love
to do so but the final call is with the regulators."

* As offshore yuan volume has risen dramatically, companies
offering FX trading on their platforms like ICAP , the
world's biggest interdealer broker, have benefited. ICAP
reported a record volume of $92 million in trades last Friday
with more than 110 institutions trading on its EBS platform.

* Norman Chan, the chief executive of Hong Kong's central
bank, has been busy trying to convince the Russians recently on
the potential of the offshore yuan market. That seems to be
bearing fruit. Both VTB and Vnesheconombank have shown interest
in issuing dim sum bonds soon.

* The rise of high-yield issuance in the dim sum market
means that more rigorous credit analysis is needed before
investing in these credits because the default risk is real,
HSBC said. High-yield bonds comprise about 14 percent of total
outstanding issuance compared to nil in January. The bank
leads the dim sum league tables.

CHARTS OF THE WEEK:

Rapid growth in Hong Kong's pool of yuan deposits has been
tracking increasing volumes of trade settled in the renminbi.

link.reuters.com/duq32s

Dim sum bond issuance is on track to cool down in June after
two consecutive months of record issuance.

link.reuters.com/fuq32s

Performance of dim sum bonds in the secondary market has
been poor in June.

link.reuters.com/buq32s

The NDF market reflects bets on yuan strength have been cut.

link.reuters.com/cuq32s

MAJOR PRODUCTS AND DEVELOPMENTS IN YTD 2011:
January: China allows its companies to make overseas investments
in yuan whether it is for launching new businesses as well as
for mergers and acquisitions. The scope of the pilot program is
limited.

February: Average CNH daily trading volume surges to about $800
million from a tiny $10 million last June. The development of
the offshore yuan market has also created the offshore forwards
market, with the curve fairly liquid up to the one-year tenor.

March: Singapore comments on its ambitions of becoming an
offshore yuan hub. With many banks in Singapore already offering
yuan-denominated products, it is already the busiest center for
offshore yuan trading after Hong Kong.

March: Hong Kong-based banks are allowed to transfer yuan funds
into a so-called fiduciary accounts, which are maintained with
the central bank and the proceeds of the account will no longer
be included in the balance sheets of Bank of China (BOC) Hong
Kong (Holdings) Ltd .

April: Billionaire Li Ka-shing's Hui Xian real estate investment
trust raised 10.48 billion yuan ($1.6 billion) in an
initial public offering in Hong Kong's first yuan-denominated
IPO. The IPO had a tepid debut with shares falling nearly 8
percent.

May: German car maker Volkswagen (VOWG_p.DE) marked its debut in
the dim sum bond market by selling 1.5 billion yuan in five year
bonds.

LEAGUE TABLES*:

YTD dim sum bond issuance:
Book runner: Proceeds (RMB mln): # of issues:
1. HSBC 18,854.6 30
2. Standard 6,773.7 15
Chartered
3. RBS 5,563.5 11
4. JP Morgan 5,200.0 5
5. Deutsche Bank 4,944.3 8

YTD synthetic RMB bond issuance:
Book runner: Proceeds (RMB mln): # of issues:
1. Deutsche Bank 4,479.2 3
2. Citi 2,912.5 2
3. Bank of China 2,312.5 1
4. Bank of America 2,312.5 1
Merrill Lynch
5. HSBC 1,248.5 2

* Thomson Reuters data as of June 23

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