Institutional investors may have to start rethinking their renminbi strategies now that the Chinese central bank has stepped up its efforts to deter one-way bets on the currency.
That's the view of Jeremy Armitage at State Street Corp., who thinks investors need to start thinking about better managing the risks associated with the Chinese currency as they continued this week to lap up new renminbi-denominated debt.
To help curb aggressive appreciation expectations and reduce capital inflows into China, the People’s Bank of China has set a weaker onshore renminbi (CNY) exchange rate fixing against the US dollar over the last two weeks.
As a result both CNY and its offshore version CNH have recoiled sharply of late, sending them down 0.61% and 0.82% against the dollar, respectively, for the year-to-date period, according to Linan Liu, a strategist with Deutsche Bank.
That extra volatility has left a question mark over the perception of the renminbi currency as a one-way appreciation bet and has implications for broader investment strategies in China, reckons State Street's Armitage.
Institutional investors need to change their mindset from one of making “easy and steady” profits by simply going long of the renminbi to trading the currency within the context of an investment risk management framework, said the US-based financial services firm's senior managing director and Asian head of sales, trading and research.
"You need to look at the renminbi as part of your overall currency strategy,” Armitage said. To be more specific, institutional investors needed to start thinking about currency volatility and about having a robust investment framework to guide their investment decisions, he said.
The PBoC’s recent actions have helped to narrow the spread between CNY and CNH, leaving CNH spot for the first time this year at a discount to the CNY spot.
This leads to a further question about whether institutional investors’ interest in CNH bonds have been dented. The spread between the two markets is one of the top reasons that investors are active in CNH trades, according to Armitage.
Renminbi bond rush
However, debt capital market bankers retain a more sanguine view.
“I see continuous investor interest in renminbi-denominated bonds and the year-to-date issue volume records the highest level compared to the past years,” said Choon Hong Tee, head of Greater China DCM with Standard Chartered.
The offshore renminbi bond market has seen a rich pipeline of transactions in the last two weeks. International Finance Corp, the World Bank's private sector arm, is going to issue Rmb1 billion notes in London. That's after two multinational corporations, Caterpillar and BP, raised Rmb1.25 billion and Rmb1 billion, respectively, earlier in the week in Hong Kong.
Bank of China's Singapore branch on Wednesday issued Rmb3 billion of dual-tranche “Lion City” bonds, the largest renminbi-denominated bond in Singapore. The sizable deal was four times-covered, with strong demand mainly from Singaporean and European investors.
“The recent exchange rate volatility is not a long-term trend for renminbi weakening and the bonds usually have a tenor of at least two years. That’s why investors are still willing to dash into the offshore renminbi bond issues,” said a DCM banker based in Hong Kong.
Some global bank analysts have a similarly relaxed viewpoint.
“We do not believe there has been a [Chinese] shift towards preferring a weaker renminbi to boost growth,” said a February 26 HSBC research note.
The bank maintained its year-end forecast for the CNY exchange rate against the dollar at 5.98. It nonetheless said that the path to this point could be more volatile than in the past.