Apr 28 2012
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Evolution of renminbi is well under way
However, while many people have focused exclusively on the importance of trade between these two regions, I think it's equally important that we look at the Chinese renminbi (RMB) itself. Concomitant with the rise of Asia, we've seen an evolution of the Chinese currency, from a trading currency towards its use as an important funding currency.
One deal that helped demonstrate the importance of the renminbi to the Middle East is the recent RMB 1bn (US$158m) bond for Emirates NBD -- the first offshore RMB (also known as CNH) bond for a Middle Eastern issuer. Off shore RMB bonds such as these effectively allow issuers to borrow directly in renminbi.
These so-called 'Dim Sum' bonds are issued by companies who want to raise RMB outside China and differ to other off shore bonds such as 'Samurai' Bonds (yen-denominated bond issued onshore in Tokyo by non-Japanese companies) or Australian 'Kangaroo' bonds (issued in the Australian market by non-Australian firms, denominated in the Australian currency.)
However while different in issuance, these have a common aim: to achieve diversified funding for issuers outside their 'home' currency.
Issuers choose to launch bonds such as these for four main reasons: First, from an issuer's perspective, they increase the geographical spread of investors they borrow from. In effect, this means that they borrow from a completely new base of investors who may not have bought USD or AED denominated issuances.
Second, if companies are regularly doing business in Asia, then this can become an important funding tool as an RMB issuance gives them a new pool of currency which they can hold in reserve. When they need to pay out RMB, they can do so from this cash reserve, though onshore and off shore RMB have slightly different exchange rates.
Third, overseas issuances help a corporation improve their 'name recognition' in key international markets.
So, if an issuer wants to issue again, they can do so knowing that they have a track record.
And, should they want to physically expand with a new factory or office -- they are not an unknown foreign entity. This is particularly useful for manufacturers that rely on their brand for exports.
It's of course hard to quantify the importance of overseas name recognition, but I think this is an important point. Before bonds are sold, issuers go on roadshows to meet with potential investors.
During this process issuer meet a large number of local, on the ground investors who all hear about the issuers business and gain a vital insight into their business model and outlook. So, not only do investors hear about one specific bond, they also hear about the opportunities presented by the wider MENA region.
Finally, the cost of funding may well be less. Even if issuers want to gain RMB funding, or exposure to Asia, they won't sell RMB bonds if it costs significantly more than USD or AED debt. Given the huge pool of RMB-denominated capital pooled in HK looking for investment opportunities, it may well be that tapping into this opportunity actually results in cheaper funding.
I think one of the effects of this particular bond it to encourage similar entities to think more creatively about their financing. In the past, companies have beaten a well trodden path to London to borrow. This deal shows that they can easily look to Asia for funding -- and that Asian investors will be receptive to Middle Eastern bonds.
The deal was over subscribed -- meaning that more investors wanted to buy the bond than there was room for -- which is a testament to its positive reception. It's important to note that the offshore market for renminbi didn't exist a few years ago, its growth has been massive. Total issuance in 2011 came to RMB16bn, whereas this year alone we've seen RMB 46bn: a 300 per cent growth.
In time, and with more Middle East RMB issuance, I think there will be even more interest in the Middle East 'story' than there is at the moment. The Middle East is well known internationally as an oil exporter, but that's not all the region has to offer. As more regional issuers head to Asia for funds, the quicker this perception will change.
However, it's our view that the renminbi in particular is set to become even more important as a currency for funding and trade because of the specific opportunity presented by China.
At the core lies the tremendous industrial growth seen in China but it's an over simplification to see China as just the world's factory as this ignores both the importance of the local market and the high standing of the Chinese economy on the global stage.
China started the renminbi's internationalisation in 2009 with a pilot programme that permitted the use of the currency to settle trade conducted by some mainland Chinese regions with Hong Kong, Macau and the Asean nations.
We now expect China will settle more than half its business with emerging markets in renminbi by 2013-2015, representing the equivalent of $2 trillion of transactions and propelling the currency into the top three for global trade.
Indeed, the importance of RMB as a trade currency lead to HSBC offering its MENA based customers RMB accounts last year -- allowing businesses to pay and receive RMB without having to exchange into local currency. These helped local companies 'talk the customers language' and deal in a common currency -- and perhaps offer keener pricing.
There's still some way to go before the RMB becomes a leading trade currency. While its influence is rising fast, for MENA the link with the dollar is likely to remain strong for the foreseeable future given both the local currency pegs and the fact oil remains priced in dollar.
So, the evolution of the RMB is well under way. The first RMB bond from the Middle East shows that it's now an important regional funding tool, bringing new investors into regional bonds.
However, it's also proof of the development of MENA too, away from it being a pure provider of hydrocarbons and towards being seen as an established region for international investment.
© Copyright Zawya. All Rights Reserved.
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