At least 10 asset managers are preparing to launch yuan-denominated funds in Hong Kong to tap robust overseas demand for yuan assets amid expectations of faster yuan appreciation and broader investment channels, two people with direct knowledge of the matter said.
One source said the fund unit of HSBC was among the asset managers planning the launch while Guotai Junan Securities Co has said its Hong Kong unit was preparing a yuan fund.
The plans come after five institutions including UBS, Schroders and Haitong Securities Co, launched yuan funds in Hong Kong in recent months that drew feverish demand from investors despite a shortage of investment channels for the Chinese currency in the former British colony.
Fund managers are betting on an expansion of Hong Kong's yuan bond market, said Zhang Haochuan, analyst at Shanghai-based fund consultancy Z-Ben Advisors. Yuan appreciation and China's rapid economic growth are also making investors to scramble for yuan assets.
Most of the planned yuan funds will be raised through private placement, with some institutions planning to start marketing as soon as this month ahead of the Lunar New Year holiday in early February, said the sources, who declined to be identified because they are not authorised to speak to the media.
China is encouraging international use of its currency and aims to develop Hong Kong into an offshore yuan centre, part of efforts to reduce reliance on the U.S. dollar in the aftermath of the global financial crisis.
Yuan circulation in Hong Kong totaled 280 billion yuan ($42.3 billion) at the end of November, and in an effort to create an offshore market for yuan products, China has allowed global institutions and companies, including the World Bank, McDonald's Corp and Carterpillar to issue yuan-denominated bonds in the city.
In addition, China may let companies conduct yuan-denominated IPOs in Hong Kong, and is also planning to allow offshore yuan to be invested in the mainland under the so-called mini-Qualified Foreign Institutional Investor (mini-QFII) scheme.
Overseas demand for yuan assets is also driven by expectations that China may allow the yuan to appreciate faster, with some economists forecasting a 6 percent rise in the currency's value this year.
HAITONG, UBS, SCHRODERS
Haitong, China's second-biggest listed brokerage, launched the first yuan-denominated fixed-income fund in Hong Kong last August, triggering a rush to launch similar products.
Swiss bank UBS and British asset manager Schroders followed suit as they each launched a privately-placed yuan fund worth around $500 million late last year, and the products were soon snapped up their their clients hungry for yuan assets.
A Singaporean asset manager and ICBC Asia, the Hong Kong unit of Industrial and Commercial Bank of China (1398.HK) (601398.SS) have also launched yuan funds in Hong Kong.
The fund boom comes despite a limited number of yuan investment products in Hong Kong and their relatively low returns.
One source said that a big portion of the funds raised by UBS and Schroders still rests in cash, but investors are not worried as long as they can get exposure to yuan assets, betting yuan will appreciate and investment channels will be broadened.
Yuan-denominated gross bond issuance more than doubled in 2010 to 41 billion yuan in December from 16 billion yuan in 2009, bringing total bonds outstanding to around 60 billion yuan, according to Standard Chartered Bank.
Strong demand for yuan bonds, however, has been pushing yields into a downward trend, enabling companies to borrow money more easily in Hong Kong than in the mainland.
For example, Sinochem Hong Kong (Group) has priced its 3.5 billion yuan, three-year bond issuance in Hong Kong at a coupon of 1.8 percent, much lower than in mainland China where companies generally have to pay over 4 percent in coupon. ($1=6.66 Yuan)