Something different

As international asset managers seek to capitalise on rising growth prospects in China and Chinese investors seek new opportunities overseas, a fresh range of investment options is opening up.

In recent months, the Chinese currency the renminbi (RMB) has been a major area of international focus. At a macro level a growing number of countries, including the US, have expressed concern that the renminbi is undervalued to such an extent that it gives Chinese manufacturers an unfair pricing advantage over global competitors in export markets.

But beyond this debate the RMB offers increasing potential for global investors. A raft of RMB denominated offshore bonds dubbed “Dim Sum Bonds” has launched as the Chinese government has moved to liberalise its financial system. While direct investment in the Chinese currency outside the mainland and Hong Kong remains strictly limited, these RMB offshore bonds now present valuable access to foreign investors.

Initially seen as a static, illiquid prospect, the RMB offshore bond market has recently seen a major increase in secondary trading, thanks to growing demand and wider liberalisation. Investors seeking to buy these bonds outside mainland China need only set up a trading account in Hong Kong. In turn, broker/dealers who wish to trade in these instruments can set up an RMB cash and securities account locally or, subject to some restrictions, in their own country.

The core appeal of RMB bonds and bond funds lies in the perceived undervaluation of the renminbi.The RMB offers strong potential for appreciation and the positive returns that would accrue from any upward movement in the value of their underlying currency. While RMB denominated offshore bonds currently offer low yields and only limited short term returns, they do present an attractive long-term proposition and provide one of few immediate routes for foreign institutional investment in the Chinese currency.

Growing interest

Interest in RMB bond funds is building. Allianz Global, Manulife and Schroders are just some of the global investors currently offering these products and the list of promoters is growing. In turn, the Chinese government is keen to slowly “internationalise” its renminbi currency. The People’s Bank of China (PBOC) has worked closely with the Hong Kong Monetary Authority to gradually liberalise trading conditions for the RMB. In June this year the PBOC released its latest circular* on RMB cross-border transactions which clarified a number of key market issues and was broadly welcomed by global investors.

To date, Hong Kong has been the key centre for RMB bond funds, thanks to its geographic proximity to China and national ties. However, the Chinese and Hong Kong authorities are acutely aware of growing competition from other centres such as Singapore and may move to liberalise the Hong Kong RMB market further in the months ahead. Investor service providers such as RBC Dexia offer local support to asset managers and continue to monitor developments in this sector closely. As with any emerging market investment, RMB bonds are not entirely risk free – fund manager credit risk and trade related operational risk are factors that investors should always consider carefully when considering their options. 

International opportunity

For Chinese investment managers seeking to boost their own worldwide distribution, UCITS structures offer a robust, well regulated and established route into foreign markets. While many of these funds are likely to be based in European centres such as Luxembourg, Hong Kong also provides a range of fund specialists and servicing providers, including RBC Dexia, which can assist with the structuring, administration and asset servicing of these funds.

A raft of these UCITS has already been established and this pool looks set to grow significantly in the months ahead. Despite much regional talk aimed at creating a pan-Asian UCITS alternative, little concrete progress has been made in establishing this model. For now, UCITS is the preeminent collective fund vehicle for global and regional distribution of foreign securities investments.

Amongst their many advantages, UCITS are now also investable by Chinese qualified domestic institutional investors (QDIIs) under the QDII scheme for Chinese investors seeking foreign investment fund opportunities. That said, whilst this was correct at time of press, every reader interested in opportunities relating to this area should always double check and verify the qualification of any products they wish to distribute in this way.

While still classed as an emerging economy, China holds huge potential opportunities for foreign investors. As its wealth grows, global investment opportunities will also become increasingly attractive to Chinese nationals. In both cases detailed and reliable market intelligence is essential for success. Robust investment management and investor support will also be crucial to safeguarding assets and avoiding any potential pitfalls facing both local and global investors as these exciting markets fully develop.

Alessandro Silvestro
Director, Business Development Sales & Distribution
RBC Dexia Trust Services Hong Kong Limited

*The PBOC Circular on Clarifying Relevant Issues of Cross-border RMB Transactions 2011.

© 2012 RBC Dexia Investor Services Limited. RBC Dexia Investor Services Limited is a holding company that provides strategic direction and management oversight to its affiliates, including RBC Dexia Investor Services Trust, which operates in the U.K. through a branch authorised and regulated by the Financial Services Authority and in the DIFC through a branch authorised and regulated by the Dubai Financial Services Authority. In Australia, RBC Dexia Investor Services Trust is authorised to carry on financial services business by the Australian Securities and Investments Commission under the AFSL (Australian Financial Services Licence) number 295018.

All are licensed users of the RBC trademark (a registered trademark of Royal Bank of Canada) and Dexia trademark, and conduct their global custody and investment administration business under the RBC Dexia Investor Services brand name.These materials are provided by RBC Dexia Investor Services for general information purposes only. RBC Dexia Investor Services makes no representation or warranties and accepts no responsibility or liability of any kind for their accuracy, reliability or completeness or for any action taken, or results obtained, from the use of the materials. Readers should be aware that the content of these materials should not be regarded as legal, accounting, investment, financial, or other professional advice, nor is it intended for such use. Trademark of RBC Dexia Investor Services Limited. 

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