Lack of long-dated instruments hampering offshore RMB market

A strong demand for long-dated offshore RMB instruments is not being met by the market, according to one Hong Kong corporate

A shortage of long-dated instruments is hampering the development of the offshore renminbi (RMB) market, despite strong buy-side appetite for such products, according to the head of Hong Kong-based conglomerate Jardine Matheson.

Speaking at the Asian Financial Forum in Hong Kong, Anthony Nightingale, chairman and managing director of Jardine Matheson, said there was an increasing need for corporates to hedge their forex risks with offshore RMB-denominated derivatives as the currency becomes more international.

However, while financial institutions are attempting to meet corporate requirements, longer-dated instruments are in short supply, resulting in high pricing and volatility.

Jardine Matheson’s status as a pan-Asian conglomerate made it particularly aware of the need for these types of derivatives, Nightingale said.

“Corporates such as ours need to manage that risk in the same way as other currency exposures. Financial institutions have responded with the development of interest rate swaps, cross-currency swaps, forwards and options. While progress has been made, the risk appetite [from the sell side] in long-dated tenors where we foresee increasing demand is still limited, with wide volatility in pricing,” he said.

Nightingale called for an increase in the RMB pool outside China. “In particular, we would like to see longer tenors of five years or more for corporate loans where at present markets are still limited.”

Margaret Leung, chief executive at Hang Seng Bank, also speaking at the Asian Financial Forum, was confident that the expanding value of RMB funds outside China would soon prompt financial institutions to expand their RMB derivatives offerings.

Pointing to China’s move to issue new rules on RMB qualified foreign institutional investors at the end of last year, which allows the overseas arms of mainland funds and broker houses to invest in mainland securities, she expects the scheme to be widened to include foreign financial institutions (FFIs). “Soon it will be open to other FFIs under a more normalised scheme. This is expected to widen the investment channel for overseas RMB funds and add new momentum to making the RMB an international currency.

“With non-mainland investors and corporates being allowed to accumulate RMB offshore, and offshore RMB being given more freedom to cross the mainland border, we expect to see the emergence of RMB derivatives linked to currency, interest rate, bonds and equities from financial institutions outside the mainland,” Leung said.

Total RMB deposits stood at nearly 630 billion yuan at the end of November, according to the Hong Kong Monetary Authority. RMB deposits among corporates in Hong Kong doubled in 2011 from 259 billion yuan to over 440 billion yuan, and 150 billion yuan was issued in the form of dim sum bonds (Hong Kong’s RMB-denominated bond market), according to Leung.

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