Maturing yuan becoming a player in investment products

Gifford Nakajima

Within the space of about a decade, the yuan has gone from being little used outside of China to becoming a major player in trade financing, payments and in the forex markets.

Now the Chinese currency is starting to make its way into yet another sphere – the consideration set for clients globally looking to diversify their investment portfolios.

But many savers in the UAE have yet to fully understand the benefits of investing in yuan products. As the yuan continues to mature, that looks set to change.

Since the first yuan-denominated bonds were issued in Hong Kong in 2007, the market for so-called “dim sum bonds” has expanded massively. On the trade front, just 12 per cent of China’s trade was settled in yuan at the end of 2012. By 2020, the percentage is expected to be about 50.

These trends will continue as Beijing pushes to restructure its economy and integrate it more into the global financial markets. The Chinese authorities have been actively encouraging mainland companies to invest more overseas.

As more companies and investors use the yuan for trade, hedging, cash management and financing in different parts of the world, the differences between the renminbi and other major global currencies are starting to diminish, and more and more yuan-denominated investment products will become available to ordinary savers.

The recent decline in the yuan has dented short-term sentiment, but does not change the overall picture. The currency remains well backed by strong fundamentals and government support. Changes to the way the official daily reference rate is arrived at, announced on August 11, were designed to make the exchange rate more market-orientated, and were a key development in the currency’s evolution, rather than a step towards more sustained falls.

As the yuan is becoming increasingly popular for investment purposes, offshore markets are expanding their offering of yuan-denominated products.

Canada, Australia and the UK currently only offer yuan savings. They plan to launch more sophisticated products, such as unit trust or bonds, in the near future to better satisfy the investment needs of its customers.

Singapore, Malaysia and Taiwan, however, already offer a full range of investment products, and are working on deepening product lines to better satisfy the increasingly sophisticated yuan investment needs of their customers.

For now, the yuan is not yet fully convertible, and China’s capital markets are not fully open. Over the past few years, however, Beijing has been gradually relaxing restraints on the currency, allowing it more room to fluctuate against the US dollar and opening the doors to more capital flows into and out of mainland China.

For example, certain institutional investors can buy directly into mainland China’s capital markets through the Qualified Foreign Institutional Investor (QFII) scheme. An extension of this scheme, dubbed RQFII, was introduced in 2011. This allows qualified foreign institutional investors to use the yuan to do so. Clearing banks have been set up in 15 jurisdictions to facilitate this.

Despite recent stock market jitters, more initiatives are in the pipeline, including the Qualified Domestic Individual Investors (QDII2) scheme, which will start allowing some retail investors in mainland China to invest overseas, and could unleash billions of yuan in Chinese savings on to global stock, bond and property markets. A link between the Shenzhen and Hong Kong exchanges is also said to be in the pipeline.

Such schemes are helping the Chinese currency to go mainstream. By creating growing yuan liquidity pools offshore, they are facilitating the development of a broader range of renminbi-denominated investment products outside China.

For retail investors around the world, this means greater direct access to a broader range of Chinese asset classes and investment options, and an ever-widening range of ways in which they can buy into what is – despite the slowdown – still the world’s fastest growing major economy.

Gifford Nakajima is the head of wealth development for the UAE and Mena at HSBC


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