The offshore RMB bond market was developed as part of China's attempt to internationalise its currency, the renminbi (RMB). It enhances the circulation of renminbi outside mainland China. China is the world's second biggest economy, but the level of international trade settled in RMB is markedly low. China wants to encourage foreign trade and investment in RMB and help promote the renminbi as a trade, investment and ultimately reserve currency.
Has trading in renminbi increased in recent years?
In 2010 just 2.6 per cent of China's trade was transacted in its local currency. In 2012 China trade in RMB reached 8 per cent of all goods trades.
What is CNH?
The CNH market is used to refer to the renminbi market offshore. CNH is used as the pseudo-currency code for offshore renminbi while CNY is the official currency code for Chinese currency traded onshore in China. CNY and CNH exchange rates are different.
The main source of CNH liquidity comes from foreign suppliers who receive RMB from Chinese manufacturers through cross-border trade. Foreign suppliers or investors who have accumulated CNH deposits look for ways to invest these funds. Hence the arrival of CNH bonds commonly referred to as ‘dim sum’ bonds, which are exposed to the offshore CNH exchange rate.
Who issues offshore RMB bonds?
Issuers of offshore RMB bonds in Hong Kong have included Chinese and international banks, foreign companies such as McDonald's and international organisations such as the Asian Development Bank.
The majority of offshore RMB issuance has come from Hong Kong although a similar market is now developing in the UK. HSBC was the first to issue a renminbi bond in London in April 2012.
Singapore is also emerging as an offshore hub for the renminbi, and Taiwan will commence RMB business in February 2013, suggesting it too may develop as a renminbi centre.
Why are investors interested in the CNH market?
After the recent financial crisis and in response to European Union sovereign debt concerns, global investors and risk managers have reassessed where they are exposed geographically and have been keen to place greater funds in Asia.
Historically, access to the onshore RMB bond market has been restricted, so the CNH market has enabled foreign investors to gain exposure to RMB.
Offshore RMB: 2013 and beyond
HSBC expects that issuance of offshore RMB bonds will continue to be dominated by the Chinese government, Chinese banks and corporates. Major global companies will increasingly seek to raise capital in RMB, following the example of businesses such as Volkswagen, Tesco and America Movil. London should continue to develop as an offshore hub for dim sum bonds though Hong Kong is expected to remain the most active market.