LUXEMBOURG Feb 27 Bankers and policymakers
across Europe want a slice of the growing market in China's
offshore currency, but a slowing economy and the yuan's recent
slide may make investors wary.
In barely five years, China's gradual liberalisation of its
renminbi, or yuan, currency has inspired a slew of investment
funds based in Hong Kong or elsewhere, including those aimed at
the retail market.
"Dim sum" bonds are designed to be traded outside China and
there is a large turnover in the offshore renminbi in the
big foreign exchange trading centres such as London.
Luxembourg, Paris and Frankfurt are also competing with
Asian centres for a share of this offshore trade.
Investors have been attracted by China's earlier
double-digit economic growth and by the renminbi's careful
management on an appreciation trend. They can generally only
access the currency through these off-shore instruments.
But a recent fall in the renminbi suggests the central bank
is keen to wipe out a speculative bubble in Chinese assets and
make its currency more competitive as the U.S. withdrawal of
monetary stimulus batters other emerging market currencies,
potentially making their exports cheaper.
This pressure to restrain renminbi appreciation may slow
China's offshore currency expansion.
"Over the next few months, you will see some tension between
the hot money and the internationalisation of the renminbi,"
Frederic Neumann, co-head of Asian economic research at HSBC,
told a conference in Luxembourg this week.
China's yuan briefly fell on Thursday and remained below the
official fixing for a third straight day. Normally closely
managed, it has fallen a hefty 1 percent in the past two weeks.
Unlike countries such as Kazakhstan and Nigeria, which have
let their currencies fall as their dollar supplies dwindle,
China has $3.8 trillion in central bank reserves to support it.
But analysts think the central bank is now aiming to inject
more two-way volatility into the market and prepare it for more
reforms, stamping out speculative bets on the currency.
Overstretched investors were positioned for further yuan
gains, rather than the fall.
"It was a shock, the people (buying the yuan) were 30 times
leveraged," said Stefano Chao, Investment Manager at AZ
Investment Management, in Shanghai.
The move dents China's image as a relative safe haven for
debt investors, because of its double-A rating, one of the
highest for emerging market sovereigns.
Dim sum bonds have turned into a 400 billion yuan ($65
billion) market in little over three years, mainly out of Hong
Kong. But investors are less likely to buy into the market if
they can no longer get guaranteed currency appreciation.
Another attraction of buying the offshore renminbi has been
the prospect of the onshore currency eventually becoming fully
convertible, being bought up by central banks as a reserve
currency and merging with investors' offshore holdings to become
one of the world's most active currencies.
But international investors are far less upbeat about the
speed of this change than Chinese investors. An investor survey
by State Street this week showed that while 30 percent of
onshore investors see the renminbi as one of the top two traded
currencies by 2020, no offshore investors do.
China's growth has also slowed to the 7 percent level widely
seen as the minimum required to underpin social and economic
change, and investors are worried about defaults within the
large shadow banking sector.
"There is a continuing and growing fear outside China about
how well this transition from an export-led economy to a
consumption-led economy will occur," said Michael Metcalfe, head
of global macro strategy at State Street Global Markets.
"The fear is there will be a rapid slowdown in growth."
Reflecting caution among European and U.S. investors, most
dim sum bond investors and issuers are based in Asia.
But with China still a magnet for foreign direct investment,
an increasing amount of it denominated in renminbi, financial
centres outside Asia also want part of the action.
According to research by consultancy PwC published this
week, 63 percent of China's $118 billion FDI was settled in
renminbi last year, compared with only 12 percent in 2011, and a
larger share of outward FDI is in renminbi.
It has overtaken the Swiss franc to become the world's 7th
most used currency for payments, acording to global transactions
Hong Kong is by far the largest centre for offshore
deposits, according to the PwC survey, with deposits in Taiwan,
Singapore and Macau also dwarfing Luxembourg, Paris or London.
The United States is nowhere to be seen in this competition.
The European offshore renminbi centres are struggling for
liquidity without their own clearing banks, although Britain and
China have been discussing one.
The key, according to speakers at this week's Luxembourg
conference on the offshore renminbi, is for western companies to
be far more open to investment and payments in China's currency
- particularly as Chinese tourists increase, with their
well-known love for luxury goods.
That may already be starting to happen. "Chinese customers
on the Champs Elysees, more and more they can use a credit card
in renminbi, and that's very important," said Bernard Poignant,
China advisor at Paris Europlace.