Renminbi GDRs under discussion for London
Agricultural Bank of China (ABC) and the London Stock Exchange (LSE) are exploring how to launch renminbi-denominated Global Depository Receipts (GDRs) in the UK in what would be a landmark development of the offshore RMB market, two market sources have told GlobalRMB, a sister publication of GlobalCapital Asia.
The initiative, which GlobalRMB understands falls within the scope of the memorandum of understanding (MoU) that ABC signed on June 17 with the LSE, aims to provide overseas RMB holders with a more direct access to China’s capital market.
The proposal is still at a very early stage, and will require approval from regulators in China, GlobalRMB understands. But draft guidelines have been drawn up and are set to be discussed, according to the sources.
The LSE and ABC declined to comment.
GDRs represent ownership of underlying domestic shares, held by the custodian bank, which in this case would be ABC. The asset class is typically used as a way for investors to gain exposure via their domestic market to foreign companies. The London market already hosts many foreign companies in GDR form, traded in US dollars, but the new proposal would be the first time that GDRs have been available in renminbi.
The MoU stated, without going into detail, that ABC and the LSE would work towards establishing new RMB equity products for the London market. According to one of the sources that spoke to GlobalRMB, this refers to GDRs.
“RMB GDRs are the product the two sides are working on at the moment, but the details on things like the qualifications of the companies, the amount of shares, or whether a new RMB quota for this particular product will be set up and who will be qualified to purchase it, all still need to be finalised,” said the source.
If offshore investors want to tap China’s onshore capital market directly using RMB, currently they must use the Renminbi Qualified Foreign Institutional Investors (RQFII) scheme, which was launched in December 2011. The UK gained an Rmb80bn RQFII quota in October 2013.
“It would be good to have a separate RMB quota for GDRs instead of sharing the RQFII quota," said the source. "Besides, the RQFII quota can also be used to buy fixed income products in China’s domestic market, but the targeted investors of these products are different.”
And the consensus among market participants is that a separate quota for GDRs would better help develop the potential of London’s RMB market.
Choosing the right names to use the new product is an important reputational concern for London, and sources said that the LSE was expected to be cautious.
“The LSE only wants big company names to kick off the new product, and I believe the Chinese side may think the same way if both want to play safe at the beginning,” said a second source.