The offshore renminbi has been a haven for bankers and bond issuers throughout much of the last 18 months. Chinese companies could cut their funding costs by turning offshore. Foreign issuers could raise their profile with investors, show their dedication to a market that Chinese government officials have shown they are serious about — and raise a good chunk of the renminbi they need to fund their projects in the mainland.
For a long time, these issuers could rely on an investor base that did little more than nod, lick its lips and place orders. There were so few opportunities for newly-formed renminbi funds to put their money to work that they were willing to take almost anything that came to the market. Investors were price-takers, driven as much as by their faith in the rise of China’s currency against the dollar — a great way to enhance yield — as they were by credit concerns.
But two things happened late last year that buckled confidence in the market: deposits fell, albeit temporarily, and the Chinese renminbi dipped against the dollar, limiting the willingness of investors to accept low yields. That made the job of bankers working in the bond market a lot harder.
These two moves may not prove to be isolated events — and some analysts already think deposits are on a downward trend. That would limit the amount of cash that bond investors have to put to work, put more strain on funding costs and undermine a market in which many banks have spent time and money trying to become key players.
More importantly, it would hurt the chances that the renminbi loan market can grow at a decent pace.
The end of the beginning?
Loans bankers are hoping that the offshore renminbi loan market will become a decent part of their revenue stream by the end of the year. This does not entirely rely on the concentration of renminbi deposits being spread between more than the handful of banks than now hold them — but the growth of deposits at smaller players would certainly help. That now looks unlikely to happen.
Renminbi deposits have already bucked a strong trend of growth over the last two years. They fell from Rmb622.23bn ($98.6bn) to Rmb618.5bn from September to October last year; the first time drop on a monthly basis since October 2009 (although they rose again in November, finishing the year at Rmb627.3bn).
But analysts at Crédit Agricole are now predicting a more frightening prospect: deposits not just falling for a month or two, but over the course of a whole year. Frances Cheung and Dariusz Kowalczyk, senior strategists at the bank, think that deposits will end the year at around Rmb610bn, around 2.8% below the most recent figures in November.
This does not mean that the offshore renminbi loan market will die before it ever really lived. As long as the big depositors like Bank of China and HSBC agree to free up their deposits and start lending, creating an interbank market in the process, the loan market has a chance to grow. Some senior bankers at foreign institutions were always sceptical they could win a big chunk of deposits in the first place.
But if the Crédit Agricole analysts are correct — and they have proven themselves among the most astute observers of the market over the last year or so — then the syndicated loan market is now reliant on the willingness of a few banks to free up liquidity. It does not take a Basel wonk to know that, right now, that is unlikely to happen in great size.