Hu Jintao, the President of the People’s Republic of China, was in Hong Kong last week. He was celebrating the 15 year anniversary of Chinese control of the special administrative region, as well swearing in Hong Kong’s new chief executive, CY Leung. But bankers and investors in the offshore renminbi market hoped for a lot more than smiles and handshakes, and they were left disappointed.
The last time a senior Chinese government official made a public appearance in Hong Kong was last August, when Vice Premier Li Keqiang pitched up. His visit coincided with a number of measures — a Rmb20bn mini-QFII scheme, direct dim sum issuance from mainland companies, more Chinese government issuance — that have since been put into place.
President Hu dangled few specifics in front of offshore renminbi market participants, and although the Hong Kong Monetary Authority released a widespread statement in the run-up to his visit, there was nothing concrete, or particularly new, in the statement.
I’ve heard that somewhere before
The HKMA said the Chinese government would issue more dim sum bonds, but this was already well known. It said mainland officials would encourage more issuance from the country’s borrowers, but they have been doing this for some time. It said China will further expand the use of the renminbi outside of the mainland, but such expansion is clearly a key facet of the government’s much-discussed policy of renminbi internationalisation. It said it will expand offshore renminbi lending, but the recent announcement of a repo scheme was partly designed for just that. And it said Hong Kong will get support as a trade settlement centre, but it already has this support.
The only somewhat specific announcements were that the government would increase mini-QFII quotas, and support cross-border renminbi flow between Guangdong, Hong Kong and Macau. But even these moves were long expected by analysts, and little detail was given.
It is clear that Hu’s visit brought less in the way of new measures that it did reminders of old ones, including some that are still in the works. But that should not be considered such a bad thing. For a government that has earned a reputation of gradual development, China has allowed the offshore renminbi market to grow remarkably quickly. It is sensible to hold back with new measures for a while, lest investors and issuers start to suffer from growing pains.
My how you’ve grown
The offshore renminbi market has grown at a rapid pace since July 2010, when the HKMA allowed deposit holders to freely transfer between different banks. Deposits were worth Rmb533.9bn at the end of May, up 523.7% on the same period in 2010. Dim sum issuance is already $6.4bn, compared to zero in the first half of 2010, although slightly down on the same period last year, according to Dealogic. Swap liquidity is developing. Lending is picking up. Trade settlement is increasing.
Hong Kong and Chinese authorities have, despite the evident growth in the bond market over the last few years, pushed ahead with recent changes that will help the broader market. Hong Kong officials have expanded the range of assets banks can hold in reserve, allowed them to take more exposure to the renminbi, and created a repo scheme that will boost liquidity at offshore banks. The Chinese government has pushed local companies to go offshore and encouraged longer maturities, even recently selling a 15 year deal itself.
It is still too early to tell what impact these measures will really have. The repo move is unlikely to directly expand lending, but it could increase the willingness of banks to take deposits. Longer maturity deals could bring more insurance companies into the market. The loosening up of liquidity ratios could squeeze liquidity for offshore renminbi products, in particular swaps.
These measures all make sense in isolation, and taken together can have a big — and positive — impact on the offshore renminbi market. But it makes sense for the Chinese government to do what it was well-known for — take a step back, wait, and watch what happens.
The offshore renminbi market has fast become a revenue-generating market within its own right, but many bankers still think it is being seen by the Chinese government as a test case for developing the onshore market. That makes it forgivable that no concrete measures would be announced during Hu’s visit. After all, so much has changed already.