The Size of the Beast

30/01/12

Whilst China has the second-largest economy in the world, it also has 20% of the global population and 25% of the labour force. Nevertheless, the country only accounts for 14% of the world’s gross domestic product, a figure distinctly disproportional to its population.

Although the statistics show China is already a global powerhouse, it still has vast potential to expand. If there is to be a rival to the dollar as the world’s reserve currency in the 21st century, it surely could be the Renminbi (RMB) – the currency of the People’s Republic of China. 

By 2015, half of international trade operations (USD 2 trillion) could possibly pass through Hong Kong.  Over time, it is believed that the final phase of the RMB internationalisation process will mean foreign holders of RMB have the capacity and desire to retain and invest their RMB funds both in and out of mainland China.  To complete the process, Chinese authorities would like to make the currency fully convertible.  To accompany the process initiated by officials, Hong Kong’s strength as an offshore centre lies in its ability to develop a wide range of RMB products and services

Time for a breakthrough 

Meanwhile, Chinese policymakers have already introduced multiple accommodative taxation, trade finance and capital account measures to ease the internationalisation process of the RMB. The primary aims are to reduce costs on foreign exchange transactions and for the RMB to increase in value. Overall, this should encourage investors to switch to the currency in favour of the US dollar. 

The offshore RMB bond market is growing rapidly and current demand largely exceeds supply. Growth is driven by the restrictions on access by foreign investors to the onshore RMB bond market. Bond issuance is key for the market to continue growing and we believe new issuance should remain strong. 

Outstanding offshore RMB bond issuance is around RMB200bn (as at end October 2011);

 The pipeline suggests another RMB50-100bn for the rest of 2011;

•  Some European and North American companies may be using the offshore RMB market for ‘instant recognition’ in Asia;
•  The market is becoming more ‘two way’, and issuance is mainly from high quality issuers

  

Even if the story of China’s economic might is nothing new, that does not mean to us that investors have missed the opportunity. Quite the contrary, we see at least three forces that should help support local growth and investment opportunities over the coming years, including long-term macroeconomic plans, the coming political transition period and growing RMB-denominated markets. We also believe investors have ample means to get exposure to the China story in portfolios both directly and indirectly.

It seems that signs of a breakthrough are already slowly appearing for those investors wishing to enter the Chinese market - how appropriate for the year of the Dragon.

Fund Houses to look out for in particular would be those like HSBC who have great experience and knowledge of China and its potential – so take a look at the RMB Fixed Income Fund for example.