Henry Wong of BEA Union Investment Management Limited looks at developments, opportunities and challenges for RMB bonds, and considerations for investors.

Date: Dec 2011

Tags: Bonds, RMB, Yield, China, Portfolio construction

• Demand is continuing to outstrip supply in the offshore RMB market in Hong Kong, leading to distorted yield returns
• Investors should stay short in maturity in RMB bonds
• National policy is the main risk with RMB bonds, along with interest rate risk
• Initially, there was a misconception that RMB bonds were going to be an asset class which would only rise and provide a capital gain – however, this is not the case

When looking at the trends in RMB bonds, Henry Wong said in an interview that any new market or new product is always subject to demand and supply forces at the initial stages.

This is still happening in the offshore RMB market in Hong Kong, he explained, where demand is continuing to outstrip supply, leading to them being quite distorted in their yield return.

With more and more participants entering this market, however, Wong said he hopes that yield returns will normalise going forward. This means that the offshore yield return should rise in order to match the domestic yield return.

As a result, Wong said he foresees that RMB bonds will on the one hand give investors a very stable return, and on the other it will give them a higher and higher coupon going forward.

RMB bonds within portfolios

According to Wong, investors should stay short in maturity in RMB bonds – which matches with the maturities of two or three years from current issues due to it being a new market.

Main risks with RMB bonds

National policy is the main risk with RMB bonds, said Wong, given the policy-driven nature of the mainland market.

However, he added, he said this risk is small because internationalisation of the RMB is not likely to be a short-term fad – and once the Chinese government starts the engine, it cannot stop it.

Whenever people talk about a currency being adopted as a reserve currency, there is a need to give people faith and confidence in the money they are holding, he explained, otherwise the whole process will collapse.

As a result, there will be a floor for the RMB on a long-term basis, which is crucial for the success of the internationalisation of the currency.

The other risk is interest rate risk, added Wong, given that so many countries have a shortage of liquidity and therefore interest rates are expected to rise.
 
Misunderstandings

Initially, said Wong, there was a misconception that RMB bonds were going to be an asset class which would only rise and provide a capital gain – however, this is not the case.

Since this is part of a long-term project, if investors hold their RMB bonds to maturity, Wong said he thinks it will give them a decent return under current market circumstances.

But it is not an instrument which will give them a very short-term gain, he warned.