Analysis:China offshore yuan market booms even as yuan bets fade
By Saikat Chatterjee
HONG KONG (Reuters) - Three years after China launched its most ambitious experiment yet to give its currency more global clout, some market watchers are writing its epitaph, saying Beijing is not loosening its grip on the yuan fast enough to attract sustained interest.
But others say incremental changes in Chinese regulations are creating more channels for investors to move yuan between domestic and offshore markets, pointing to a growing market in Hong Kong that Beijing is using as a testbed for far-reaching reforms which could one day see the yuan become a global reserve currency.
"The landscape has changed for the better," said Tee Choon-Hong, regional head of capital markets, North Asia at Standard Chartered Bank, referring to the recent introduction of new guidelines allowing companies to invest yuan in China.
While many of the earlier deals in the offshore yuan market (CNH) were driven by speculation that China would allow faster appreciation of the yuan, Tee and others said that is no longer the single driving factor behind the market's growth.
Multinationals such as heavy equipment maker Caterpillar (CAT.N: Quote) are eager to plough more money into the country to fund expansions. While capital controls still make it tough to get offshore yuan back into the China, their gesture of selling yuan-denominated bonds is unlikely to go unnoticed by Beijing.
"A market that has previously blown hot and cold due to shifts in yuan gain expectations has made the transition to a more sustainable growth trajectory," said Tee, who shepherded McDonald's (MCD.N: Quote) first yuan bond in Hong Kong in July 2010.
For the offshore yuan market, that marks a sea change. It is now the more developed, liberal counterpart to China's still tightly controlled domestic market, and recent reforms show authorities are more confident about its prospects.
Indeed, some economists argue that the rapid expansion and development of the offshore yuan market could give Beijing enough confidence to speed up broader reforms domestically, by giving sophisticated investors more access to relatively underdeveloped mainland markets, though full convertibility of the yuan may still be a long way off. Continued...