HK bourse to sell RMB products

A foreign exchange counter in Hong Kong. The stock exchange there will introduce yuan-denominated debt and currency products that the onshore market doesn't have, Chief Executive of HK Exchanges and Clearing Ltd Charles Li said on Thursday. Provided for China Daily

Exchange will develop wider range of hedging tools for debt, currency markets

The stock exchange in Hong Kong will introduce yuan-denominated debt and currency products that the onshore market doesn't have, Chief Executive of HK Exchanges and Clearing Ltd Charles Li said on Thursday.

Li said these products, to be introduced in the coming years, will offer hedging tools to offshore investors.

Li said the Hong Kong Shanghai Stock Connect, a cross-border stock trading program known as the "through train", could be extended to fixed-income and currency products.

"Mutual market access between Hong Kong and the mainland gives us great scope for imagination. HKEx needs to develop more new products to prepare for that," he told a forum on the yuan in Hong Kong.

According to Li, in the next three to five years, the Hong Kong bourse will establish links with commodity exchanges in Shanghai as well as Dalian, Liaoning and Zhengzhou, Henan. Then mutual market access will be extended to fixed-income and currency products.

"Many international investors have a strong demand to trade in mainland fixed-income products, but they have no access now," Li said. "They would be interested in trading on the onshore bond markets through Hong Kong if the Hong Kong-Shanghai tie could expand into fixed-income products and currencies."

"With the Hong Kong Shanghai Stock Connect, the HKEx can play a bigger role to link foreign issuers and onshore capital," said Robert Yu, head of debt capital markets at China International Capital Corp Ltd. "After rapid development in the past five years, China's onshore bond market has become the third-largest in the world, and it offers a great variety of products to investors."

Yu noted that although the Chinese government has encouraged foreign entities since 2005 to issue yuan-denominated bonds in the mainland (panda bonds), there hasn't been much action in that market. The problems are technical - different governing laws, accounting standards and pricing issues, he said.

German luxury carmaker Daimler AG was the most recent issuer of panda bonds. It sold 500 million yuan ($80.2 million) in one-year bonds on March 14 at a yield of 5.2 percent.

"When a two-way street is created and new products are developed, certainly Hong Kong will embrace a more active offshore renminbi market," Yu said.

"It's important to have access to China's interbank bond market, where 90 percent of bond market liquidity is concentrated," said Jack Wang, managing director and head of the institutional client group at CSOP Asset Management Ltd. "Currently, overseas investors can tap the market through the renminbi qualified foreign institutional investor program.

"We see increasing demand for this channel. Some investors have become very sophisticated, using qualified foreign institutional investor products as well as RQFII products to arbitrage between offshore and onshore yuan," he said.

The QFII program allows foreign investors to use offshore foreign currency to trade in mainland equities. The RQFII program allows similar investors to use offshore yuan for the same purpose.

"However, I am also amazed by how little some other investors know about RQFII - even major hedge funds. There are a lot of RQFII products available. Investors really need to try them to tap the opportunities that come with China's opening up."

Separately, analysts said that the market for dim sum bonds (yuan-denominated bonds issued outside of the mainland), though popular among international investors, needs more depth.

"On the one hand, we have accumulating liquidity - not only in Hong Kong but also Taiwan and Singapore. On the other hand, there is a scarce supply of yuan-denominated investment instruments. That creates problems in the secondary dim sum bond market. People just buy and hold because of the availability issue," said Frances Cheung, head of rate strategy of Credit Agricole CIB.

She added that while demand for dim sum bonds is high in general, there is little supply in the medium-term segment of the market, which covers five- to 10-year maturities.

"To fill the gap, we need some issuers to have that incentive to issue five-year bonds. Outside Asia, there are some United States and European companies that have direct investments in China that may need medium-term money to fund their projects in China."