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CNH’s long-term prospects look promising: DBS

03 Jan 2012

Renminbi cross-border trade settlement has become more attractive and issuance of dim sum bonds have quadrupled since 2010. These provide solid prospects for the future of the CNH, says the Singaporean bank.

Growing global economic pessimism has made markets extremely sensitive to ailing Chinese economic data but DBS believes the expansion of offshore renminbi trading and settlement beyond Hong Kong is one positive to look out for in 2012 and beyond.

“The market could remain jittery in the short term given the highly unstable global environment,” said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings in a research report released on December 15. “But that will not derail the long term development strategy of the market.”

The Chinese government has revealed conscious efforts to boost its exports as well as tighten regulatory oversight on cross-border trades.

This has resulted in a better balance between renminbi-denominated invoicing for exports and imports.

“This is a favourable development seen by Beijing as more exports settled in renminbi could slow the accumulation of Chinese foreign exchange reserves, one of the initial goals of implementing renminbi cross-border trade,” declared Chow.

The recent moderation of the CNH deposit accumulation, which dipped to Rmb13.2 billion (US$2.1 billion) in September, compared to a monthly average of Rmb45.5 billion in the first quarter of the year is perceived to be negative.

But according to DBS, the reason for the slowdown is due to a more balanced import-export mix in renminbi invoicing, rather than shrinking trade transactions.

Dim sum bond market

In the offshore renminbi bond markets investors are being increasingly selective nowadays and paying more attention to issuers’ creditworthiness. This has led to a rise in the average debt yield to 3.65% in November, nearly double the figure in the first half of last year.

The bank believes the constant evolving pricing structure of the dim sum market better reflects the underlying credit and liquidity risks more efficiently.

Analysts at DBS bank also highlighted that the average funding cost for dim sum is still lower than that of top-rated onshore corporate bonds and are the lowest amongst the largest emerging markets.

“Corporations with no Chinese business exposure would also find it more profitable to use this route to fund their dollar assets, even after adding the swap costs of renminbi into dollars,” said Chow.

The issuance of dim sum bonds stands at Rmb170 billion for 2011, four times the amount issued in 2010.

CNH internationalisation

In the long term, DBS foresees the expansion of offshore renminbi trading and settlement beyond Hong Kong as inevitable.

There have been indications that China will base a third CNH clearing bank in Singapore.

“Singapore is a sensible candidate not only because it has a well developed financial market, but also it is a financial and trading hub in the Association of Southeast Asian Nations (ASEAN),” noted Chow.

London has also expressed a strong interest in developing the offshore market.

The bank anticipates that London – the largest global foreign exchange trading centre – could facilitate the circulation of renminbi-denominated products within Europe if it becomes a CNH centre.

“The growing interest shown by various countries to become offshore centres reflects the rapidly expanding demand for offshore renminbi,” said Chow. “It also signifies and opportunity for China to expedite its efforts to facilitate the internationalisation of renminbi, a crucial step towards China’s transformation into a more advanced economy.”

03 Jan 2012