Currency instability and a lack of transparency in domestic bank deal reports is more of an impediment to growth in the offshore renminbi loan market than the lack of a reference rate for pricing, the Asia Pacific Loan Market Association (APLMA) vice chairman and China committee chair, Wilson Wan, has said.
His comments follow APLMA chair John Corrin’s call last week for an interbank reference rate to improve liquidity in the market. Corrin told IFLR sister publication Euroweek that a market wide reference rate urgently needed to be launched to enable banks to get the market going.
Hong Kong’s Treasury Market Association (TMA) last week began posting the funding rates of the three major RMB depositors – Bank of China, Standard Chartered and HSBC – in a bid to address such concerns.
Wan, who is also Bank of China International’s leveraged and structured finance head, told IFLR that the move was a good start and an adequate reflection of a market still in its infancy. But he argued the development of a benchmark pricing rate for CNH, similar to the Hong Kong Interbank Offer Rate (HIBOR), would not be enough to grow the market.
“Certainly it will help but for more offshore RMB loans to come to fruition, what we really need is a more stable offshore currency, so borrowers are more willing to borrow in CNH. Investors' willingness to hold CNH lies on preserving value rather than appreciation,” he said.
The lack of corporate loan demand for the currency was a key problem, he said. The limited offshore RMB deposits held by foreign banks, and the resultant lack of immediate sourcing of RMB revenue available to them, was an ancillary issue, he said. “It’s a chicken and egg situation,” he added.
“Borrowers’ expectation of RMB appreciation is hurting everyone by discouraging participation in the loan market and shifting market interest to the seemingly more cost-effective offshore RMB bond market,” he said.
CNH bond market investors are willing to charge a lower credit cost than banks because of dis-intermediation, different risk appetite and currency appreciation expectation, he explained. The majority of CNH bonds are issued by banks that apply the fund for the same currency assets or corporations that are keen to hedge.
But he believed recent loan market developments were on the right track, as the expectation of CNH appreciation cools down and bond yield drives up with an increased supply of papers.
“Currency stability is still the most important thing, however. Without it, it’s a one-sided market,” he said.
Wan also called for more transparency in domestic bank deal reports. The development of a mandatory deal reporting system for China’s banks would significantly help onshore market growth, he said
“APLMA is working to encourage domestic banks to be more open with deal information,” he said. A system needed to be developed that facilitated more transparent dissemination of data and made it clear what information could and could not be released.
The China Loan Syndication and Trading Association of the China Banking Association has taken this suggestion seriously, he said. But reaching consensus among domestic banks remained a challenge. “Some may worry about opening themselves up to competition and privacy if deal information is made public,” he said.
The Chinese government is eager to see RMB internationalising, he said, and is therefore open to allowing banks more flexibility in managing their CNH positions.
In keeping with this, the Hong Kong Monetary Authority this week raised the limit on authorised institutions’ RMB net open position to 20 % from 10 %.
This adjustment was made after taking into account the authorised institutions' enhanced risk management practices on RMB business and the development of the offshore RMB market in Hong Kong, HKMA said.
Under the new requirement, all authorised institutions should restrict their RMB net open position, whether net long or net short, to 20 % of the size of their respective RMB balance sheet.