HK offshore Rmb needs streamlined repatriation

Author: | Published: 5 May 2011
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A leading securities group has called for China’s central government to develop a more streamlined repatriation approval process in the offshore renminbi market.

Asia Securities Industry & Financial Markets Association (Asifma) chief executive and managing director, Nicholas de Boursac, told IFLR that bringing offshore renminbi back onshore was still complex.

With many provinces and municipalities involved in the approval process, a standard application form would be helpful, he said.

“At the moment each province has to be approached separately, so establishing a relatively standardised application process would be more efficient,” he added.

“Ideally, our members would like a central process in which things are approved in one place, but this is unlikely in the short term,” he said. Provincial parties will want to have a say on what is going on in their region.”

Offshore renminbi fixings would also help the market, he said, although it may take time to develop the required market depth for these.

“You really need to have volume to be able to have dependable fixing; so I think we can put the pieces in place, but the question remains as to when the Hong Kong renminbi markets will be liquid enough to be comfortable with that fixing,” he explained.

A Hong Kong-specific interbank lending rate similar to the LIBOR will need more interbank deposits from market participants in order to become a reliable fixing, he said. But the market may also consider a fixing alternative based on swap interest rates.

In the meantime, the lack of an renminbi Hong Kong interbank offered rate (HIBOR) rate is holding back the development of an offshore renminbi syndicated loan market, Linklaters’ Hong Kong-based co-head of banking and projects, Trevor Clark said.

Linklaters’ Asia head of capital markets, Andrew Malcolm said offshore renminbi floating rate notes would only become available when such a rate develops. He added that it did not make sense to use an onshore rate such as the Shanghai interbank offered rate (SHIBOR) because that was not accessible by offshore banks or borrowers and could only serve as a very imperfect proxy.

There are also new documentation issues related to market disruptions that could prevent delivery in renminbi, explained de Boursac.

Such issues could be addressed through specific triggers that would allow settlement in an alternative currency; however, there is a question now with respect to when and under what circumstances such alternative settlements should be triggered.

“It’s possible that market illiquidity could prevent a party from delivering renminbi, but the issue still to be resolved is at what point would such illiquidity be deemed to trigger this alternative settlement,” he said.

According to Malcolm, the question of appropriate currency fallback clauses for bonds and derivatives documentation was becoming important as more sophisticated, international borrowers access the offshore market, said Malcolm.

“There has been a perception that currency risk is an issuer risk, because it could result in an event of default, but investors are now also looking for protection in the sense of a fallback to payment in a freely convertible currency like US dollars,” he said.

China seems to be more open to utilising Hong Kong as the testing ground for these and other issues that may arise as the market develops, said de Boursac. “It is easier for Chinese authorities to try something new in Hong Kong as opposed to somewhere outside of China.”