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HSBCGlobal Asset Management (USA) Inc, a wing of HSBC Holdings plc , has launched a Chinese Renminbi (RMB) fixed income mutual fund for the American investors. Earlier, HSBC had issued the first Chinese Renminbi bonds in London in April. The HSBC Global Asset Management’s Hong Kong-based Asian Fixed Income team will manage these funds.
Investment in the Chinese currency bonds will provide the American investors an opportunity to be a part of China’s developing bond market and benefit from the potential appreciation of its currency. The aim of the fund is to maximize returns, driven by capital appreciation and income through investing in RMB exposing fixed income securities.
The offshore RMB bond market has picked up momentum since 2010 due to the commencement of the RMB internationalization process in 2009 by the Chinese government. It is a three-stage process in which, Renminbi will transform into an investment as well as a global reserve currency from a trading currency.
The process involves the trade settlements in RMB to generate liquidity pools comprising of various currencies. This liquidity will be deployed in savings and variety of investments that will make RMB more attractive, given the convincing investment scenario for RMB bond markets driven by competitive yields and appreciation potential of the currency. Gradually, the RMB bond market will become one of the strongest.
Investing in RMB fixed bonds will not only maximize the American investors’ returns, but also will provide them with the geographical risk-diversification as well as expose them to the fast evolving Chinese economy and currency.
In November 2011, JP Morgan Asset Management, a subsidiary of JPMorganChase & Co. (JPM - Analyst Report), had been granted permission by the Chinese government to create a $1 billion RMB fund under the Qualified Foreign Limited Partner program (QFLP). The deal will allow JPMorgan to become the largest overseas manager of the renminbi bonds.
We expect HSBC to gain significantly from RMB bonds. As the investors have been losing confidence in the American as well as European markets, they will prefer to invest in the emerging Asian economies. China is an economic powerhouse and its bonds are set to be very successful. Though the world economy is reeling under the Euro-zone crisis, it has had only a limited impact on Asia. Further, Chinese currency has maintained itself against the U.S dollar.
As the demand for the RMB denominated assets continue to grow, HSBC will benefit from the surfeit of opportunities that will come up by developing the offshore Chinese bond market. The banking giant expects the bond market to reach the 1-trillion mark in the next three years.
Currently, HSBC retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.