Hype is returning to the renminbi capital markets. After a few lacklustre years for Chinese equities, Shanghai and Hong Kong are on their biggest bull runs in years, while interest rate cuts have lifted interest in renminbi bonds.
Bears have been squeezed out and the global consensus now says that China can avoid a disastrous slump as it rebalances its economy on a more sustainable footing. Usage of the Chinese unit jumped in 2014, making the renminbi the fifth-biggest currency for global payments, according to payment messaging firm Swift.
That all sounds like good news for the renminbi financing markets, but there is much more to it Offshore funding has stalled, with Dim Sum bond issues slumping more than 50% in the first four months of the year. Overseas lending and overseas share sales in renminbi have yet to get off the ground. Usage of the currency may even be falling in some circles, according to a recent HSBC survey.
In earlier years, any pause in the renminbi’s global march could be happily attributed to currency speculation. As hot-money hedge funds were never supposed to be the target audience for China’s international push, they were easy to blame for any volatility.
Fast forward to 2015, however, and the onshore-offshore equation is raising some fundamental questions over the renminbi’s internationalisation. Global demand dynamics have shifted – perhaps forever.
Those that can access mainland markets are now buying domestic securities, not offshore paper. China’s monetary easing is inflating equity prices, adding local liquidity and pulling down domestic bond yields, while, in the global markets, the currency is under pressure. Just as interest rate arbitrage gave the Dim Sum market a big boost in its early days, China’s monetary policy means it is now the onshore market that is dominating attention.
The question for international market participants, therefore, is whether this will become a long-term trend. As China continues to open up, the sheer scale of its domestic markets could easily relegate the overseas renminbi experiment to little more than an afterthought.
For the mainland to capture the attention truly of long-term international investors, however, many more reforms are needed. Mainland China’s bond markets may be liquid, but there are serious questions over creditors’ rights, as well as lingering uncertainty over Beijing’s ability to deal with a dangerous overhang of local government debt. The first onshore defaults are only just starting to come through, with potentially grave implications for risk pricing.
The A-share equity market, too, is a long way from a stable and efficient allocator of growth capital. Valuations, especially in the small-cap arena, are eyebrow-raising, and trading patterns often defy fundamentals. China’s regulators know this, and have yet to relinquish their tight control over IPOs, in part for fear of a social backlash from the masses of individual investors if future deals go sour.
Doubtless, there will come a time when investment barriers are removed, and there is a free flow of funds between onshore and offshore markets. That time, however, is still a long way off. Until then, the international arena will remain an essential part of the renminbi’s development.
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