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HSBC RMB liquidity: Make the right connections

With RMB internationalisation, the expansion of RMB usage is driving demand for RMB liquidity management alternatives. Read the article to find out more about the HSBC RMB money market solution.
18 August 2022
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    Risk Disclosure

    • The Fund invests mainly in RMB-denominated short-term deposits and high quality money market instruments
    •  The Fund’s investments may involve credit, credit rating, liquidity, volatility, currency, tax, concentration, interest rate, valuation, emerging markets risks, mainland China market risk, RMB conversion and currency risks, mainland Chinese debt risk, risks associated with investing in China Interbank Bond Market, RMB denominated class risk, and risks related to Reverse Repurchase Transactions, general debt securities, sovereign debt and money market funds
    • The purchase of the units of the Fund is not the same as placing funds on deposit with a bank or deposit taking company. The Fund has no obligation to redeem units at their offering value and the Fund is not subject to the supervision of the Hong Kong Monetary Authority. Investors may not recoup the original amount invested in the Fund
    • Investors should not invest solely based on this document and should read the offering documents for details

    Key takeaways

    • International usage of the RMB has been on the rise in the last decade. Today, the RMB is the world’s third most used currency in trade finance and fifth most active currency for global payments1
    • As offshore RMB circulation continues to increase, there is a need for viable alternatives intended for institutions and individuals to manage their RMB cash needs. The HSBC Global Money Funds – Renminbi fund can potentially serve investors who are seeking a relatively lower risk and highly diversified solution for managing RMB liquidity
    • Against a global economic backdrop defined by monetary policy normalisation, upside inflationary pressures and market volatility, a lower risk investment alternative, such as RMB money market funds, can appeal to investors looking for conservative options or short-term parking. Despite the cloudy outlook for the Chinese currency in the shorter term, the RMB’s fundamentals in the longer term remain intact particularly with support from mainland China’s strong current account surplus and measured monetary / fiscal policy support for the economy
    • The HSBC GMF – Renminbi fund aims to preserve capital2 and provide daily liquidity by investing in a diversified portfolio of high quality and short-term RMB denominated instruments. In addition, the Fund aims to achieve an investment return that is comparable to normal RMB money market rate. These are compelling characteristics, particularly when compared to lower yielding short-term alternatives or potentially higher yielding time deposits on which they forego liquidity

    HSBC Global Money Funds - Renminbi

    New RMB money market fund to meet increasing demand for RMB cash management

     

    As offshore RMB circulation continues to increase, there is a need for viable alternatives intended for institutions and individuals to manage their RMB cash needs. In this spirit, we are pleased to offer a new money market fund for investors who are seeking a solution for managing RMB liquidity. The HSBC Global Money Funds – Renminbi (the “Fund”) joins two other existing sub-funds under the HSBC Global Money Funds (GMF) umbrella: the Hong Kong Dollar sub-fund and the US Dollar sub-fund. The HSBC GMF – Renminbi fund aims to preserve capital2 and provide daily liquidity by investing in a diversified portfolio of high quality and short-term RMB denominated instruments. In addition, the Fund aims to achieve an investment return that is comparable to normal RMB money market rate.

     

    Fig. 1: HSBC GMF – Renminbi fund details

    Table 1

    Source: HSBC Asset Management, 3 August 2022

    Why now?

    International usage of the RMB has been on the rise in the last decade. Today, the RMB is the world’s third most used currency in trade finance and fifth most active currency for global payments.1  In advancing RMB internationalisation, the offshore RMB market plays a critical role, with Hong Kong, the UK, Singapore, the US and France ranking as the top clearing hubs for global RMB transactions outside of mainland China. Offshore RMB liquidity has deepened and RMB internationalisation has progressed as a result of numerous regulations and programmes that connect mainland China’s markets with the rest of the world, starting with the introduction of the dim sum bond market in 2009, the launch of the Cross-Border Interbank Payments System (CIPS) in 2015, and the launch of the Stock Connect and Bond Connect in 2014 and 2017.

    RMB internationalisation has been further advanced by global demand for RMB denominated assets. With mainland China steadily opening up its onshore capital markets to foreign investors and implementing reforms in financial markets over the years, major global index providers have completed or started their multi-year processes of including domestic Chinese equities and bonds into their widely tracked indices. This index inclusion process drives inflows into RMB assets and provides medium term support for the Chinese currency. Among the latest initiatives to integrate onshore markets is a newly announced “Swap Connect” programme that will provide mutual access to Hong Kong and mainland China’s interbank interest rate swap markets; northbound trading is set to begin first, with launch expected in six months’ time.

    One of the key milestones for RMB internationalisation was the inclusion of the RMB in the Special Drawing Rights (SDR) currency basket in 2016. This year, the IMF has uplifted the RMB’s weight in the SDR basket from 10.92 per cent to 12.28 per cent, effective on 1st August 2022. Along with this decision, the People’s Bank of China (PBOC) emphasised its commitment to further open up onshore markets and build a more friendly environment for global investors.

    At the same time, the central government has committed to strengthening Hong Kong’s function as a global offshore RMB business hub as evidenced in mainland China’s 14th Five Year Plan. In deepening and expanding the connectivity between mainland China and Hong Kong’s financial markets, Hong Kong also continues to serve as a gateway between onshore and global markets.

    Fig. 2: RMB is the fifth most active currency for global payments

    Currency share of global payments

    Table 2

    Source: SWIFT, June 2022

     

    Lower risk option in RMB money market fund against uncertain global macro backdrop

    Mainland China’s economic growth has been under pressure in 2022 on the back of a COVID drag as well as property sector weakness. In Q2, mainland China’s GDP growth slowed to 0.4 per cent year-on-year as the nation dealt with its worst COVID wave as of yet. Mainland China has been implementing both fiscal stimulus and monetary easing measures, while growth risks imply that there can be further policy easing. This, combined with the economy’s reopening, should support a recovery. However, the tightening policy adopted by the US is creating a more pronounced divergence with mainland China’s policies, which could act as a constraint. As a result of these economic conditions, year-to-date, the USD has strengthened against the CNY and the CNH. USD bonds have seen yields rise. Meanwhile, onshore CNY money market rates have been driven down this year, on the back of ample liquidity in mainland China.

    Fig. 3: Market rates comparison

    Graph

    Source: Bloomberg, 9 August 2022.

     

    Market outlook

    We can expect volatility in the RMB to continue in the short term as the US Fed continues on its rate hike path. With the policy divergence with other markets and possible economic recovery challenges, the RMB may face further pressure. The clouded RMB outlook could result in a decline in the offshore RMB deposit base, leading to higher rates in the offshore market. In the onshore space, liquidity is expected to remain abundant and should keep onshore money market yields at lower levels.

    Against a global economic backdrop defined by monetary policy normalisation, upside inflationary pressures and market volatility, a lower risk investment alternative, such as RMB money market funds, can appeal to investors looking for conservative options or short-term parking. Despite the cloudy outlook for the Chinese currency in the shorter term, the RMB’s fundamentals in the longer term remains intact particularly with support from mainland China’s strong current account surplus and measured monetary / fiscal policy support for the economy.

    HSBC GMF – Renminbi portfolio strategy

    The HSBC GMF – Renminbi fund is primarily invested in RMB denominated short-term deposits and high quality money market instruments. The Fund’s investment process seeks to manage liquidity, interest rate and credit risks. We currently prefer to be barbelled between the overnight / 1-week and 3-month tenors given the steepness of the curve. Our preference for longer tenors is relatively subdued given the flatness beyond the 3-month mark. We are now targeting a weighted average maturity (WAM) in the 40-50 day range, depending on reinvestments and roll down.

    Opportunity set and allocation: The Fund has the flexibility to invest in both the onshore and offshore RMB universe. Within the onshore universe, the Fund has the option to invest in the large and liquid market of mainland China government / credit bonds as well as money market instruments such as negotiable certificates of deposits (NCD) / commercial papers (CP). At this time in the market cycle, however, China onshore money market rates have come down and the recent volatility in the RMB has resulted in higher rates in the offshore market compared to the onshore market, thus reflecting our preference for offshore RMB for now. For instance, 1-month CNH HIBOR is yielding 1.81 per cent versus 1-month SHIBOR yield of 1.53 per cent.  

    Liquidity: The Fund primarily maintains liquidity by investing in overnight and 1-week CNH deposits, PBOC international notes and short residual maturity China government bonds. In managing liquidity risks, we adhere to an internal liquidity ladder and aggregate limits for various types of instruments in terms of percentage holding and maximum tenors, and we also engage in liability management.

    Interest rates: In the short term, as we expect CNH yields to stay higher than CNY yields given the volatility in the RMB and the higher USD-RMB differential, we are predominantly invested in offshore CNH securities. Generally, offshore overnight rates tend to be more volatile while term rates reflect medium term fundamentals; given the steep CNH HIBOR curve up to 3-months, we expect to use somewhat of a barbell approach between the overnight and 3-month point of the curve.

    Credit: The Fund invests in a diverse set of high quality credits from various types of issuers across a wide spectrum of geographies.

    The case for considering HSBC’s RMB money market fund

    Our philosophy is that liquidity management must be focused on risk management, as our primary responsibility to investors is to aim to preserve capital2 and provide liquidity rather than delivering a higher risk / return outcome.

    Potential yield: The Fund aims to deliver an investment return that is comparable to normal RMB money market rate, that tends to sit between the overnight to 1-month tenor while providing daily liquidity. These are compelling characteristics, particularly when compared to lower yielding short-term alternatives or potentially higher yielding time deposits on which they forego liquidity.

    Diversity and quality: The Fund’s portfolio is well-diversified, adheres to issuer diversification requirements and has limits to any one issuer. This provides greater diversification compared with single issuer credit risk of deposits. The Fund can also only invest in securities with a minimum short term credit rating of A-1 by S&P, or the equivalent by Moody’s or Fitch, at the time of purchase.

    Repeatable investment process and credit expertise: The HSBC GMF – Renminbi fund is managed to a globally consistent set of investment guidelines by a dedicated team of investment professionals with local market expertise and supported by a large global networks of credit analysts, making the Fund a cost effective way of accessing our investment and credit management expertise.

    As Hong Kong’s offshore RMB infrastructure strengthens and as RMB internationalisation progresses forward, the HSBC GMF – Renminbi fund can potentially serve investors who are seeking a relatively lower risk and highly diversified solution for managing RMB liquidity.

    Note 1: Source is Swift, June 2022.
    Note 2: Preservation of capital is not guaranteed.
    Source: HSBC Asset Management, Bloomberg, 11 August 2022.

    Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. The views expressed above were held at the time of preparation are subject to change without notice. For illustrative purposes only.


    The information contained in this publication is not intended as investment advice or recommendation. Non contractual document. This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target.

     

    Important information

    The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in Emerging Markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

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