Maturing yuan becoming a player in investment products

Many savers in the UAE have yet to fully understand the benefits of investing in yuan products, writes Gifford Nakajima, the head of wealth development for the UAE and Mena at HSBC.

An employee counts yuan banknotes at a branch of the Bank of China in Taiyuan, Shanxi province. Reuters

Gifford Nakajima

Within the space of about a decade, the yuan has gone from being little used outside of China to becoming a major player in trade financing, payments and in the forex markets.

Now the currency is starting to make inroads into another sphere – joining the set of possible investments for clients looking to diversify their portfolios.

But many UAE savers have yet to fully understand the benefits of investing in yuan products. As the yuan continues to mature, that looks set to change.

Since the first yuan-denominated bonds were issued in Hong Kong in 2007, the market for so-called “dim sum bonds” has expanded massively. Just 12 per cent of China’s trade was settled in yuan at the end of 2012. By 2020, the percentage is expected to be about 50.

These trends will continue as Beijing pushes to restructure its economy and integrate it more into the global financial markets. The Chinese authorities have been actively encouraging mainland companies to invest more overseas.

As more companies and investors use the yuan for trade, hedging, cash management and financing in different parts of the world, the differences between the renminbi and other major global currencies are starting to diminish, and more and more yuan-denominated investment products will become available to ordinary savers.

The recent decline in the yuan has dented short-term sentiment, but does not change the overall picture. The currency remains backed by strong fundamentals and government support. Changes to the way the official daily reference rate is arrived at, announced on August 11, were designed to make the exchange rate more market-orientated, and were a key development in the yuan’s evolution, rather than a step towards sustained falls.

As the yuan is becoming more popular for investment purposes, offshore markets are expanding their offerings of yuan-denominated products.

Canada, Australia and the UK currently only offer yuan savings. They plan to launch more sophisticated products, such as unit trusts or bonds, in the near future to better satisfy the needs of its customers.

Singapore, Malaysia and Taiwan, however, already offer a full range of investment products, and are working on deepening product lines.

For now, the yuan is not yet fully convertible, and China’s capital markets are not fully open. Over the past few years, however, Beijing has been gradually relaxing restraints on the currency, opening the doors to more capital flows into and out of mainland China.

Despite recent market jitters, more initiatives are in the pipeline, including the Qualified Domestic Individual Investors scheme, which will allow some retail investors in mainland China to invest overseas, and could unleash billions of yuan in Chinese savings on to global stock, bond and property markets.

For retail investors around the world, this means greater direct access to a broader range of Chinese asset classes and investment options, and a widening range of ways in which they can buy into what is – despite the slowdown – still the world’s fastest growing major economy.

Gifford Nakajima is the head of wealth development for the UAE and Mena at HSBC