Reasons for RMB bond market success, argues HSBC’s Geoff Lunt
The RMB bond market continues its lift-off trajectory since the market effectively opend up in 2010, says Geoff Lunt, investment director Asian currencies at HSBC Global Asset Management.
The new offshore renminbi bond market kicked off in earnest in the middle of 2010 when the Chinese authorities lifted certain restrictions and made it feasible for many more institutions to issue bonds.
Since that point, the market has expanded rapidly from RMB29bn in July 2010, to RMB61bn at the end of 2010 and subsequently to more than RMB200bn at the time of writing.
This is, of course, still small in the terms of the overall global bond markets, which amount to $95trn.
However, in terms of opportunity, it might be fair to say the offshore renminbi bond market punches well above its weight.
The main reason retail investors are right to be so interested in this market is that for the first time they can gain exposure to Chinese currency.
Although the economic growth rate in China has moderated from the breakneck low teens year-on-year percentage increases pre-economic crisis, the Chinese economy is nevertheless still expected to outperform developed western economies by a huge margin in the coming years.
As China is the world’s largest exporter, there is much political lobbying from around the world to persuade the Chinese authorities to allow the renminbi exchange rate to more accurately reflect China’s massive current account surplus and its economic fundamentals.
But since 2005, the authorities have allowed a managed appreciation of the currency, and we anticipate this is likely to continue in the medium term.
Although there are no guarantees in the investment world, we believe that further appreciation of the renminbi against the US dollar is highly likely in the medium to long term and investors can now directly access that potential.
The offshore renminbi bond market has attracted a number of different types of issuers, and this now allows investors a good degree of diversification and increasing liquidity.
The Chinese government has issued bonds, as have the Chinese policy banks, commercial banks and corporate institutions.
On top of this, the market has also attracted global issuers, keen to get their foot in the door of a market that may eventually develop into being one of the world’s largest market places.
Recent issues from Air Liquide in France and BP and Tesco from the UK have highlighted the market’s cosmopolitan appeal.
Equally, it appears that investors also realise that if the onshore and offshore bond markets eventually merge, Chinese bonds will become a very important global asset class.
As such, we believe many are determined to make sure they gain exposure as soon as possible.
Geoff Lunt is investment director, Asian currencies at HSBC Global Asset Management