Wandering China

An East/West pulse of China's fourth rise from down under.

Jumping on the yuan bandwagon [Straits Times]

This went up on Singapore’s national broadsheet today. It argues that by and large, the only way for the Yuan to go is up though the Yuan is still some way away from challenging the U.S. dollar as the world’s reserve currency. What is significant in a localized context is that this is the reality prism Singaporeans are looking at the Chinese Yuan with this very day.

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Jumping on the yuan bandwagon
Banks offer yuan-denominated products to ride on likely trend of the Chinese currency appreciating, but caution is still needed when investing
By Lorna Tan, Senior Correspondent
Source – Straits Times, published February 20, 2011

Photo - ST

If any global currency looks certain to gain in value over the longer term, it is surely China’s yuan.

China’s economic dynamism and its vast population have sparked growing talk that one day, the yuan might challenge the US dollar as the world’s reserve currency.

Of course, that is some way off, if indeed it happens. However, banks in Singapore, eager to ride on what seems like a sure bet for a rising yuan, have jumped on the global bandwagon to offer yuan-denominated products.

Still, some caution is needed, despite China’s booming economy and moves by Beijing in the past year or two to liberalise trading in the yuan.

For a start, retail investors should note the yuan is not freely convertible into other currencies. Investors in Singapore can access only the offshore version of the yuan – which is referred to as CNH, and traded mainly in Hong Kong.

Last month, HSBC allowed retail customers to open yuan accounts – which are effectively CNH accounts – with as little as $2,000, or 10,000 yuan.

And early this month, DBS Bank launched CNH current and fixed-deposit accounts. The latter comes with a minimum deposit amount of $50,000. Bank of China also offers retail accounts.

Besides deposits, retail investors who have $50,000 to spare can consider currency-linked investments (CLIs), which are short-term structured products from DBS. These were made available on Feb 7 when DBS extended its range of currency pairs to include CNH.

There are now six currencies available for pairing with CNH – the euro, British pound, Australian dollar, New Zealand dollar, US dollar and Singapore dollar. The minimum investment amount with CNH CLI is $50,000. The duration of the investment or tenor ranges from one week to six months. To invest in a CLI, you must consider the likely exchange rate movement between two currencies of your choice. The CLI has an embedded currency option which allows the bank to repay a customer’s maturity proceeds in either the base or alternate currency, depending on the outcome of the exchange rate, said DBS.

Wealthy individuals or private bank customers can already choose from a growing range of offshore yuan products and services. For clients of HSBC Private Bank Singapore, these include yuan deposits, offshore yuan bonds, as well as a range of foreign exchange, interest-rate and equity-linked structures available in yuan.

Last month, HSBC Global Asset Management introduced a yuan Bond Fund for accredited investors in Singapore and Hong Kong. The fund invests in offshore yuan-denominated bonds. So far, it has raised about US$400 million (S$510 million) in total.

Come tomorrow, DBS is making available 16 yuan-denominated bonds to accredited investors. They include Chinese government bonds as well as bonds of corporates such as Bank of China, China Development Bank and China Resources Power.

Tenors range from six months to 10 years, with coupons – the rate of return – ranging from 1.95 to 3.75 per cent a year with a yield-to-maturity of 0.5 to 2.9 per cent.

And by the end of this month, DBS will offer yuan-denominated unit trusts and structured notes to accredited investors.

Before you take the plunge, however, here are some key considerations pertaining to yuan products.


China as a global player

Analysts expect the yuan to appreciate against the greenback at a rate of about 5 to 6 per cent in the next year or two. In fact, this has been the trend since the yuan’s peg to the US dollar was removed in 2006, noted Mr Albert Lam, IPP Financial Advisers investment director.

HSBC Global Research, for instance, estimates China’s annual economic growth to climb between 8 and 9 per cent year-on-year for the next three to five years, and expects the yuan to appreciate at around 3 to 5 per cent a year.

There are several factors that support the theory of this gradual yuan appreciation.

Economic heavyweights like the United States and the European Union have been placing pressure on China to hasten the pace of the yuan’s appreciation, on the basis that it is undervalued, giving China an unfair advantage in global trade.

Another factor is the currency’s gradual internationalisation, as the yuan is increasingly used in trade settlements.

The yuan is also used as a method by Beijing to reduce imported inflation, said Mr Ho Song Hui, research analyst at unit trust portal Fundsupermart.com.

This occurs when the raw mate-rials China imports rise in price, thereby lifting China’s cost of production for goods. This will result in a general rise in the prices of goods and services in China.

The China growth story

Economists expect China’s economy to grow at 7.5 to 10 per cent annually over the next three to five years, said Mr Ho.

Over the next five years, China’s economy is expected to become less heavily reliant on exports and to evolve into a consumption-driven economy.

And there is much room to grow, given the nation’s vast population. After all, local consumption constitutes only about 30 per cent of China’s growth, while US local consumption constitutes almost 70 per cent of its economy, noted Mr Dennis Ng, founder of financial education portal, http://www.MasterYourFinance.com.

China has a mountain of foreign reserves in its coffers

A strong and healthy international liquidity position would help to support a gradual appreciation of the currency, noted Mr V. Arivazhagan, DBS managing director, regional investment and treasury product head.

Currently, China has the highest amount of foreign-exchange reserves in the world. As at end-December, China’s US-dollar reserves amounted to US$2.85 trillion, which accounted for 30.8 per cent of the world’s reserves. This gives China much control over its currency’s direction.

‘With strong reserves, the central bank is able to effectively intervene against volatile fluctuations in the currency (in the offshore market) and reduce negative shocks on exchange rates. This allows China to see a more gradual and stable appreciation of the yuan,’ said Mr Arivazhagan.


Financial experts cautioned retail investors against the underlying risks of yuan-denominated products, such as currency fluctuations and market volatility.

Said Mr Greg Zeeman, head of personal financial services, HSBC Singapore: ‘Yuan structured products are suited for financially savvy customers who are keen to increase their investment in China. Although structured products are designed to be simple and easy to understand, investors need to be fully aware of the underlying risks.’

Small and illiquid market

DBS highlighted that the current size of the CNH market is insignificant, with yuan deposits and debt issued in Hong Kong representing less than 0.5 per cent of onshore deposits.

Along with size, the market is illiquid, which means the spread for conversion is wide, affecting returns for offshore depositors.

Mr Marc Van de Walle, managing director and head of product management at Bank of Singapore, observed that while there have been much interest and inquiries about CNH bond funds in the past year, most of these funds are struggling to be invested because they cannot find enough bonds to buy. This means that a large portion of the funds have been left in deposits, which is not ideal for performance.

‘For now, we are of the view that investors should keep to simple CNH deposit products and wait for the right opportunity to invest in quality CNH-denominated financial products,’ he said.

Interest rate and bid/offer spread risk

The attractiveness of yuan-denominated products stems from their potentially higher yields.

Mr Shrikant Bhat, head of wealth management at Citibank Singapore, urged retail investors to consider the interest rate differential between China’s and the interest rate where the investor is based.

‘Barring exchange rate movements, investors in yuan deposits will benefit only if China has a relatively higher interest rate, compared to investors’ home interest rate,’ he said.

Furthermore, http://www.MasterYour-Finance.com’s Mr Ng pointed out, retail investors could incur costs in the form of bid-offer spreads on exchange rates offered by the banks – when they first convert their Singdollars to yuan, and later when they withdraw their money and convert the yuan back to Singdollars.

With both DBS and HSBC’s yuan deposit products, all deposits and subsequent withdrawals need to be made in non-yuan currencies, which will then be converted to yuan and back at the respective bank’s prevailing exchange rates.

IPP Financial Advisers’ Mr Lam said that banks may charge wide bid-ask spreads, making each transaction or currency conversion expensive.

DBS calculated that in a scenario where a high interest rate is offered with higher bid/offer spread on exchange rates, the yuan needs to appreciate at a higher rate for the yuan fixed-deposit customer to get back his principal sum in Singdollar equivalent.

In another situation of lower interest rate offered with lower bid/offer spread on exchange rate, for the customer to obtain his principal amount, the yuan can appreciate at a slower rate.

IPP therefore warned Singdollar-denominated investors to steer away from the yuan deposit offerings from DBS and HSBC.

‘Even for the savviest investors with strong conviction that the yuan-Singdollar rate will soar, we urge them to consider the hefty sunk costs of banks’ very wide bid-ask spreads, the potential loss of liquidity and/or diversification abilities, as well as the paltry interest rates that are barely worth the trouble and exchange-rate risk,’ said Mr Lam.

HSBC’s Mr Zeeman said that as yuan deposit accounts are designed to allow customers to benefit from developments in the currency’s internationalisation over the medium to long term, HSBC has advised customers to have that time horizon in mind when taking up yuan deposits.

Capital controls

Experts warn of the possibility of capital controls that could hinder foreign investors from repatriating their foreign currencies home.

Mr Suan Teck Kin, an economist at United Overseas Bank, said that unlike the Singdollar or Hong Kong dollar, CNH is subject to strict regulation from China’s central bank. The movement of offshore yuan in and out of China is also subject to strict regulation.

Currency risk

Both Mr Lam and Mr Ng warned that investors stand to suffer a currency loss if the Singdollar appreciates faster than the yuan.

‘While this notion of capturing the yuan’s upclimb may be logical for US dollar-denominated investors, this same picture looks, at best, a lot less rosy for a Singdollar-denominated individual,’ said Mr Lam.

He explained that the Singdollar is pegged to a basket of currencies, making it probable that any appreciation of the yuan against the US dollar will herald a corresponding rise in the Singdollar.

If history is anything to go by, that gain would eclipse any rise in the yuan.

Moreover, the Monetary Authority of Singapore has announced only recently its willingness to strengthen the Singdollar further to help Singaporeans deal with rising costs. Simply put, the yuan-Singdollar outlook is quite bleak, added Mr Lam.

Mr Ng highlighted that over the past decade, the yuan has appreciated against the US dollar by 20 per cent to the present level of about US$1 buying about 6.6 yuan from US$1 being worth 8.28 yuan.

But the yuan’s relationship with the Singdollar is a different story altogether. In the same period, the yuan actually depreciated against the Singdollar to about S$1 being worth 5.15 yuan from about S$1 buying 4.6 yuan, or a depreciation of 10.7 per cent.

This means that if you had put your money into yuan deposits for the past 10 years, you would have seen your money shrinking by 10.7 per cent owing to the currency depreciation factor.


As the yuan is still a controlled currency, experts advise that participating in the yuan appreciation story may be done indirectly.

One way to participate in China equities is via a China equity-related fund, said Mr Andrew Chia, regional head of wealth management, Singapore and South-east Asia, Standard Chartered Bank.

‘Should the yuan appreciate versus the investor’s base currency, all other things being constant, he would stand to make a currency gain which would translate into gains in the fund,’ he said.

Of course, these investors must be prepared to accept the risks of investing in equities as well, such as financial and market risk, he added.

Alternatively, investors can invest in currencies that historically have a strong positive correlation with the yuan. These include the Korean won, Malaysian ringgit, Thai baht and even Japanese yen.

Still, Mr Chia said it is important for investors to have diversified investments not concentrated in any particular geographical area.

Citibank’s Mr Bhat also suggested that alternative means include mutual funds – either funds in the yuan share class, funds investing in the China A share market or Hong Kong H share market, bond funds which invest in China’s local currency bond market, or even funds that offer exposure to debt issu-ances with a mandate to increase exposure to CNH debt issuances when supply increases.

He also suggested alternatives such as exchange-traded funds.

(ETFs) linked to the Chinese markets or the currency, such as iShares FTSE/Xinhua China25 Index Fund listed on the New York Stock Exchange, and the iShares FTSE A50 China Index ETF listed on the Hong Kong stock exchange.

Mr Lam said that China-invested funds may be about the closest investors can get to yuan exposure without actually trading the currency. IPP recommends Fidelity China Focus and Henderson Horizon China which are available to retail investors.

For stock investors, Mr Ng suggested investing in Singapore firms that are expanding in China – such as food and beverage chain BreadTalk and instant beverage firm Viz Branz. Both already have profitable operations in China.



Filed under: Beijing Consensus, Charm Offensive, Chinese Model, Domestic Growth, Economics, Finance, Influence, International Relations, Public Diplomacy, Soft Power, Straits Times, Trade, Yuan

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