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Long-term investors who believe strongly in the future rise of the renminbi will be holding the faith, despite last week’s news that manufacturing was slowing indicating that China could be in for a bumpy landing.
For these investors, who agree with the widely held view that the renminbi remains grossly undervalued against the US dollarin terms of purchasing power parity and other measures, buying either renminbi currency or bonds offers an opportunity to profit from the currency’s inevitable rise.
Until recently, however, overseas investors had little or no opportunity to invest in that trend. But since 2010, a combination of factors has changed the investment landscape. According to the Hong Kong Monetary Authority, renminbi deposits in Hong Kong totalled Rmb 618.5bn ($97bn) at the end of October, down 0.6 per cent from September but still triple the amount a year ago – and 2010 marked a jump in the issuance of the “dim sum bond” market, bonds issued in renminbi in Hong Kong.
Most dim sum bonds are illiquid and total issuance is still relatively small – the equivalent of $13.4bn of such bonds has been sold this year – so the market could move sharply if there is a change in sentiment, but fund managers have not been blind to the opportunities now on offer.
HSBC Global Asset Management was the latest to the table with a renminbi bond fund offering, and was busy marketing its HSBC GIF Fixed Income Fund to UK investors in November, citing belief in the inevitable rise of the renminbi as a strong reason to invest. The fund is HSBC’s second renminbi bond fund launch of the year and joins renminbi bond funds already on offer from Alliance Bernstein, Amundi, Barclays, BNP Paribas,HSBC and Manulife and Allianz Global Investors.
Investors in the Allianz RCM Renminbi Fixed Income fund were clearly so sold on the story behind the renminbi that the company closed the fund to new investment just two months after its launch after raising $603m.
Now Allianz Global Investors is hoping to repeat that success with its Luxembourg-based Allianz RCM Renminbi Currency fund, launched in October, which it thinks might be the first offering in Europe focused only on the offshore renminbi.
The fund’s sole proposition is to profit from the expected long-term appreciation of renminbi against the US dollar. Helen Lam, the Hong Kong based manager of the fund, says Allianz is forecasting an annual appreciation rate for the renminbi of 5 per cent. That rate, coupled with an expectation of continued tight control by the Chinese leadership, would offer a low-risk investment, she says, with reasonably high certainty of achieving those returns.
The fund will earn deposit interest, but only at rates sufficient to cover the fund’s charges and expenses (the total expense ratio is estimated at 0.7 per cent, including the annual management charge of 0.5 per cent).
The fund was last week made available to UK retail investors through Hargreaves Lansdown’s Vantage fund platform, and may seem an attractive proposition on the face of it.
“It’s a daily dealing fund – they’ve made it easy to get into it,” says Ben Yearsley, investment manager at Hargreaves Lansdown. “But it’s a very specific fund for those who think the renminbi will appreciate.” He advises caution, and says it is unlikely that Hargreaves Lansdown will promote the fund in the short term.
One of the considerations investors may like to bear in mind is the instruments the fund will invest in. Ms Lam says it is only allowed to invest in deposits at the moment but is awaiting approval from the Commission de Surveillance du Secteur Financier (CSSF), the Luxembourg regulator, to invest in money market products and asset backed securities.
“We originally intended to structure the fund in a way that would allow us to invest 30 per cent of the net asset value in money market securities, which also include asset-backed securities with less than one year in terms of maturity,” says Ms Lam.
“However, due to the concern about the liquidity issue of the CNH money market products [the offshore RMB], the fund was approved with deposits being the only eligible investment. We are in discussions with the CSSF to expand the investment scope.”
Nick Smith, managing director at Allianz Global Investors Europe, says interest in the renminbi currency fund has already been expressed by financial advisers, wealth managers and private investors. He does not expect interest from institutions such as pension funds as the product is rather innovative.
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