International banks best placed to profit from renminbi

Renminbi liberalisation measures may not have added much to international banks’ bottom lines yet, but watch this space, says BoA Merrill’s Alistair Scarff.
Alistair Scarff, Bank of America Merrill Lynch
Alistair Scarff, Bank of America Merrill Lynch

Since the decision by China's regulators last July to liberalise the renminbi as a trade settlement currency, RMB deposits in Hong Kong have surged to Rmb315 million at the end of 2010, according to the Hong Kong Monetary Authority (HKMA). This has been a boon for the Bank of China in Hong Kong (BOCHK) which is the sole renminbi clearing bank. But the currency reforms have yet to trickle down to the balance sheets of Hong Kong’s international banks.

“At the moment currency trade is all about currency appreciation and redenomination. The [international] banks realistically are not making any money. It’s very simply trade out of dollar, yen, and sterling into renminbi,” said Alistair Scarff, managing director and head of Asia financial institutions research, global research at Bank of America Merrill Lynch.

For treasurers, offshore renminbi, or CNH in banker’s parlance, still only has limited scope for repatriation back to the mainland. The market for CNH bonds -- renminbi-denominated bonds issued offshore and also called dim sum bonds -- has grown quickly, but at a total outstanding market size of about $12 billion as at end-2010, and another $918 million issued so far in 2011, it remains relatively small. This leaves treasurers few options. “Few treasurers have the luxury of having the ability to put [renminbi] on one-year deposits. And if there were to be one-year time deposits, it would be much better to hold renminbi in mainland China where you could have 300bps versus 70bps [in Hong Kong],” said Scarff.

“The banks may try and create a synthetic product, but as we know the SFC (Securities and Futures Commission) has been very strict in terms of new product development. So even if we were to see Hong Kong banks creating renminbi-denominated products, be they life insurance, trusts, or even a renminbi-denominated securities market which the HKSEX is keen to create, I struggle to see how that will happen in the near term,” said Scarff. “In the long term, it will be big, there is no denying that. But if we are talking about the investment horizon for most investors which will be from between one to three years, it is not going to be there yet.”

This leaves banks waiting for quotas from the Bank of China (BOC) prescribing how much and into what products they can re-invest renminbi on the mainland. This may happen sooner rather than later, especially if commentators like Scarff are correct in assuming that the mainland authorities will not appoint another renminbi clearing bank in Hong Kong.

In the meantime, and without greater investment options, many Hong Kong banks are facing prudential issues. “Their counterparty risks to the BOCHK as a function of being the recipient as a clearing bank of renminbi deposits are close to being maxed out. That creates a counterparty issue which I don’t think the HKMA will tolerate for very long,” he said. “To me the only avenue which will reduce that prudential angle of this story is by increasing the options.”

And as the range of renminbi-denominated investment options broadens, expect treasurers’ appetite to invest in the currency to grow. “The banks which bank these companies in their home markets and can provide the end-to-end transactions will be ones who the treasurers will be relying on to provide them with a renminbi solution,” said Scarff.

But for now, Hong Kong’s international banks may just have to bide their time, at least until the range of renminbi-denominated investment options grows, which may happen as soon as the second half of this year. “[Hong Kong’s international banks] are in the prime position in my view, at least once the investment options become available to make it a viable investment choice for treasurers,” concluded Scarff.

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