Renminbi bond markets are converging

Offshore renminbi bond markets are increasingly converging with the onshore market, which will boost the currency's internationalisation, says Asifma.

Differences between offshore and onshore renminbi bond markets are decreasing in terms of yield spreads and clearing infrastructure, according to the Asia Securities Industry & Financial Markets Association (Asifma).

At a seminar on Thursday, Asifma – unveiling a white paper on the currency’s roadmap - said spreads between bond yields in offshore and onshore markets have narrowed.

The average coupon on offshore renminbi bonds has moved to 3.2% in 2014, an 80bp increase from 2.4% in 2010 when the offshore markets opened. Meanwhile, the average coupon of onshore bonds is 3.8% this year compared to 2010’s 4.7%.

Foreign investors have also changed their investment strategies, according to the white paper. In early days of the dim sum market, people bought renminbi bonds just to gain exposure to the currency; they were not particularly focused on yields.

However, the issuers are now starting to price credit much more accurately and that is upholding yields of the offshore market and narrowing the price gap between the two markets.

The trend of narrowing spreads is expected to continue, further driven by a more volatile currency market of two-way traffic instead of the one-way bets in appreciation -- and the opening up of more investment channels between the offshore and onshore markets, such as the Shanghai-Hong Kong stock connect scheme.

The development of market infrastructure will continue to integrate the offshore and onshore activities, which enables cross-border renminbi-denominated securities and payment transactions to be processed efficiently. 

The infrastructure improvement includes minimising settlement risks by synchronizing the two markets’ payment systems.

bilateral swap lines between the Chinese central bank and other central banks, as well as providing a common clearing network.

For example, it is important to maintain the fungibility of the offshore markets, according to Patrick Pang, a managing director of the fixed-income business with Asifma.

All offshore markets need to be highly connected and integrated into one global offshore renminbi market without legal or operational restrictions on the flow of renminbi between different offshore jurisdictions, said Pang.  As such, offshore renminbi bond issuers will not have to consider in which market they will issue the bonds.

Although the recent renminbi weakness has led “some small corporates to hedge their portfolio rather than yield investment”, the relatively small currency volatility will not impact investments in yield products, according to Carmen Ling, global head of renminbi solutions with Standard Chartered Bank.

To be sure, Hong Kong’s current liquidity is still relatively small, compared to the amount of deposits on the mainland, and it will take time for more convergence between the onshore and offshore renminbi markets.

“Gradual onshore and offshore participation in the renminbi markets by global central banks and investors … have contributed to the first phase of renminbi internationalization, but there is still a long way to go (before 2020 when China is expected to fully open capital account),” said Pang. 

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