There is still room for Taiwan to develop into an offshore yuan hub in the region if the Chinese currency actually makes it into the IMF’s reserve currency basket, narrowing the price and interest rate gaps between onshore and offshore yuan markets, officials and analysts said yesterday.
The observation came after transactions of Dim Sum bonds — yuan-denominated debts — sold in Hong Kong took a dive with record redemptions following the yuan’s steep depreciation in August, as China allows greater access to its onshore bond markets.
The opening is part of efforts by China to facilitate the yuan’s inclusion in the IMF’s reserve currency basket currently limited to the US dollar, the euro, the yen and the pound sterling.
The market for Formosa bonds, or yuan-based bonds sold in Taiwan, might continue to grow in the foreseeable future, because domestic life insurers spend NT$1 trillion (US$30.71 billion) each year buying foreign currency-based bonds, Taipei Exchange (TPEX, 櫃檯買賣中心) chairman Wu Sou-shan (吳壽山) said.
Local insurers are in need of extra investment channels because state-owned Chunghwa Post Co (中華郵政) takes up the bulk of government bonds, Wu said.
As of last month, there are 96 Formosa bonds valued at 61.27 billion yuan since the introduction of Formosa bonds in 2013 to help digest fast-growing yuan deposits in Taiwan.
Yuan-based bonds are excluded from the 45 percent cap on overseas investments by local insurers.
“Product innovation is necessary to deepen the local bond market, though Formosa bonds are not yet available to retail investors,” Wu said, adding that individuals can buy yuan exchange-traded funds and insurance policies.
Financial Supervisory Commission Deputy Director-General Jean Chiu (邱淑貞) said she does not see signs of demise for Formosa bonds, despite the falling popularity of Dim Sum bonds.
“Issuance interest remains strong so far, thanks to the local market’s easy access and convenience, as well as low borrowing costs,” Chiu said by telephone.
The first nine months of this year saw 52 Formosa bonds issued totaling 29.87 billion yuan, Taipei Exchange data showed.
While pricing differences might increasingly disappear between onshore and offshore yuan markets, local financial institutes can tap new yuan business opportunities aided by flourishing cross-strait trade, Chiu said.
US Legg Mason Investment expects the IMF to grant the yuan reserve currency status, but is hesitant to speculate on the impact of the move, likely to take place next month at the earliest.
“More volatility will follow after the inclusion and it is too early to tell if yuan will go up or down,” Legg Mason portfolio manager Amanda Stitt told a media briefing in Taipei yesterday.
The fund house is going short on Dim Sum bonds in the short term, she said.
Dim Sum bonds are the product of China’s effort to boost yuan in global trade and international reserves, because overseas investors’ access to onshore markets is restricted. The offshore market exists because of the capital account restrictions that might be lifted, Stitt said.
While not impossible, Formosa bonds do not have to repeat the fate of Dim Sum bonds, National Chengchih University professor of money and banking Norman Yin (殷乃平) said.
Demand from local insurers is likely to continue to support the bond market, and more exporters might feel comfortable settling business in yuan if the IMF makes the yuan a reserve currency, Yin said.
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