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EXCLUSIVE GUEST ARTICLE: HFT On Opportunities From RMB Volatility
Jelle Vervoorn
HFT Investment Management (Hong Kong)
29 April 2014
The following article is by Jelle Vervoorn, who is chief executive, HFT Investment Management (Hong Kong), which is partly owned by BNP Paribas, the Paris-listed banking and wealth management firm. Vervoorn talks about developments in the use and trading in the Chinese Renminbi, and its development as one of the world’s main trading currencies. The views contained in this article are not necessarily endorsed by this publication’s editors but we are delighted to share these insights and invite readers to respond.
The RMB has been one of the most steady investments in recent years, appreciating roughly 3 per cent to 5 per cent against the US dollar since 2004. A recent dip and increased volatility has some market watchers believing this period of continuous appreciation is coming to a close, but others see the events as an interesting opportunity.
The Chinese currency has dropped to an 11-month low after China’s central bank doubled the currency’s trading band earlier this month. The volatility has been unsettling to some but we view this as a healthy development and as a good opportunity for some investors since current prices make it an attractive entry point. China’s RMB likely will see lower point along the way, but on the longer term we’re still positive on the currency and see room for upward pressure.
But how to invest in a currency that is expected to see more volatility? One trait that makes the renminbi interesting is the difference in yields between onshore RMB and CNH, the linked offshore currency that trades in Hong Kong. The difference in onshore and offshore yields of the RMB ranges between 1 per cent to 2.5 per cent, with the CNH yielding around 2.34 and the CNY 5.54 on the different maturities (using CNY Shibor* and CNH Hibor* measures as indicators). Compare that with North American or European money market funds that offer much lower yields well below 1 per cent.
Savvy investors have exploited this unique characteristic by accessing the Chinese market through RQFII (RMB Qualified Foreign Institutional Investors) funds. RQFII funds, which first came to the market in 2012, were initially limited to mostly fixed income and a small portion of equities, then exchange traded funds and have now broadened to more asset classes. HFT recently launched an Renminbi money market, fund giving investors a way to have exposure to the currency and enjoy returns that are relatively high for money market returns.
Though the RMB expected to hit some volatility - HFT foresees upward pressure in the long run - the difference in onshore and offshore spreads is expected to continue for some time. As the currency becomes more internationalised and more freely traded, in the end there’s going to be some narrowing of the difference in yields but for now, as long as investing into China is restricted through quotas, there will be fairly wide spreads.
Growth
The nascent bond market has been growing at an average of 23 per cent ** a year for the last 10 years, reaching $4.9 trillion **, in March this year. And there’s still a way to go, although it’s now the third largest international bond market. China’s bonds do not yet make up half ** of China’s gross domestic product, putting it well below the rate in most developed markets.
Money market funds have been in the headlines in China as of late. Frenzied online sales of money market funds by e-commerce providers such as Alibaba and Tencent has put the spotlight on these funds and caught the attention of regulators. Alibaba’s Yu’E Bao became the largest money market fund in mainland China last year. Regulators now expected to introduce some additional legislation. The People’s Bank of China recently consulted with big banks on policy that would severely limit transactions made through third-party payment accounts.
Despite the spotlight, RMB money market funds domiciled in Hong Kong shouldn’t expect any direct impact from the hubbub as they are different products. If anything, the rush into money market funds in China highlights the desirability of the asset class.
Money market funds aren’t what investors traditionally think about when investing in China; instead equities have long dominated. Corporate investors as well as private banking and private wealth clients tend to hold large Renminbi deposits either in Hong Kong or elsewhere. The development of RMB money market funds offshore fill an important role in diversifying China’s market and investors’ exposure to China.
Note: **CNY Shibor and SNH Hibor only illustrate the rate difference between regions/countries. It is by no means an indication of the yield of any investments in instruments denominated in these currencies.
** Source: Wind, Chinabond.com.cn, HFT IM (March 2014)