HSBC launches FX-linked renminbi structured notes

There was further evidence of the increasing internationalisation of the Chinese currency yesterday. HSBC executed two trades for its commercial banking clients within hours of launching its new renminbi-denominated currency-linked structured deposits.

The transactions followed revisions to the Renminbi Clearing Agreement agreed on Monday by the People's Bank of China (PBoC) and Bank of China (Hong Kong), which acts as Hong Kong's renminbi clearing bank. Under the revised agreement, there will no longer be restrictions on Hong Kong banks establishing renminbi accounts for and providing related services to financial institutions. In addition, both individuals and companies can now conduct renminbi payments and transfers through local banks.

HSBC's renminbi foreign exchange-linked structured deposits offer the potential of an enhanced yield based on a currency view, with interest payments tied to the performance of the renminbi exchange rate against the US dollar or other designated currencies. The lender has a suite of foreign exchange structured products with features such as capital protection and principal conversion into a foreign currency.

"This is another significant step for the renminbi to become a major currency globally. The renminbi FX-linked structured deposits offer customers an alternative option for enhancing yields on their RMB deposits," said Gordon French, head of global markets for Asia-Pacific at HSBC.

Some analysts have argued that the recent alteration to China's exchange rate policy and its signing of the Economic Cooperation Framework Agreement with Taiwan have taken the focus away from more substantial changes to China's capital account and the liberalisation of trade financing in renminbi. As Nomura strategist Sean Darby noted in a July 9 paper, trade transactions from anywhere in the world can now be settled in renminbi.

Until June 22, that facility was only available in Asean member countries and in Hong Kong and Macau, and was restricted to companies operating in just five Chinese cities, as set out in a pilot programme initiated in July 2009. Now it covers 20 Chinese provinces.

Darby also pointed out that trade settlement using the renminbi amounted to Rmb18.4 billion ($2.7 billion) in the first quarter of 2010 -- before the expansion of the scheme -- which was five times greater than the whole of the second half of 2009.

That's not all. The scheme was expanded to include several current account transfers, including dividend payments from onshore projects. Earlier this month, Hopewell Highway Infrastructure, controlled by Hong Kong tycoon Gordon Wu, raised Rmb1.38 billion from the sale of renminbi-denominated bonds to finance the construction of expressways in China's Pearl River Delta region. It was the first issuance of renminbi bonds offshore by a company other than a bank. Hong Kong companies can now repatriate the proceeds of their renminbi bonds back to the mainland, and use profits from their onshore projects to repay the offshore investors who own those bonds.

Although Darby recognises that the renminbi "remains a strictly controlled currency", he is "puzzled why investors have yet to appreciate the rate of change in capital account liberalisation that is taking place". He also expects further relaxation on financial transactions in renminbi.

No doubt HSBC, which so often seems to be the PBoC's chosen vehicle for trying out renminbi initiatives, will play a prominent role if more relaxations are announced soon. It boasts that it was the first international bank to complete a renminbi trade settlement in the expanded pilot scheme, the first foreign bank to settle cross-border trade in renminbi in Hong Kong, and the first bank to conduct renminbi-denominated trade settlement in all the Asean countries where it has a presence.

Naturally, HSBC was also the first international bank to launch a renminbi trade finance standard rate and a renminbi-denominated commercial current account with cheque services in Hong Kong.