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切換側邊選單 切換搜尋選單

New Outbreak of 'China Fever'

Taiwan's Investors Buy Renminbi, but Risks Abound


Taiwan's hot money is flowing out of the country, pushing renminbi deposits in Hong Kong to 60 times their 2004 total. But betting on the Chinese currency as an investment is not without its risks.



Taiwan's Investors Buy Renminbi, but Risks Abound

By Hsiang-Yi Chang
From CommonWealth Magazine (vol. 420 )

Faced with low interest rates on deposits, Taiwan's investors have been searching for investment opportunities with higher returns. Aside from the Taiwan stock market, which has risen 28 percent since the beginning of the year, the catch phrase among investors has been "renminbi-denominated assets."

"China's property market was down last year, but since February this year, clients have shown newfound interest in investing in Beijing and Shanghai real estate. Others are interested in investing in China's stock markets," a senior executive at a private foreign bank disclosed recently.

It's not only high-wealth clients who are sending their idle cash to China. Even average investors have been lured by China's markets, which have risen more than 30 percent this year. Interest in 17 China and Greater China mutual funds offered in Taiwan has been rekindled, with more than NT$20 billion being injected into the funds since the stock market bottomed out.

Howard Wang, head of JF Asset Management's Greater China Team, attributes the current popularity of renminbi assets primarily to expectations that the U.S. dollar will depreciate over the long term while the renminbi's exchange rate will remain stable. China's growth rate and its stock market surge, which rank among the world's highest, are also contributing to the onset of a new "China fever" among Taiwanese investors.

The outflow of capital toward China has been directed at three main targets – stocks, real estate, and renminbi-denominated fixed-income products (such as bonds and time deposits). With financial and investment transactions between Taiwan and China still restricted, many investors have used indirect methods to move their money across the Taiwan Strait. They are being lured by the potential for high rewards, but they also face high risks because of continued dramatic fluctuations in market prices.

Is this new wave of "China fever" any different from the strain that infected investors prior to last year's market turbulence? And what steps should investors take to lower risk?

One of the tools they are resorting to is buying Chinese shares.

In 2007, Shanghai A shares suffered the worst bubble-burst in the market's history, falling by more than 50 percent. In just the first three months this year, however, they rose 30 percent, leading all major world markets in the first quarter and enticing Taiwanese investors to give China's markets another try. According to a Taiwanese broker in Shanghai, the number of Taiwanese investors opening accounts in the Shanghai and Shenzhen markets (to buy B shares, which are open to retail foreign investors) in the first quarter of 2009 grew 30 percent compared to the same period last year.

China Stock Markets Hope to Bounce Back

Qing Wang, Morgan Stanley's chief economist for Greater China, is not optimistic about China's chances for economic growth this year. He forecasts a 5.5 percent growth rate, roughly half the double-digit growth the country has experienced in recent years. But China is the only major country in the world even experiencing growth amid the floundering global economy, and that has helped its stock markets continue to soar. Also, reflecting the trend of widespread deleveraging in global capital markets, margin trading has clearly declined in China's stock markets and a bubble phenomenon has yet to appear, leaving investors convinced that it is still a smart play to move money by installments into the Shanghai or Shenzhen markets.

At present, restrictions on mutual funds sold in Taiwan, whether they be domestically and internationally managed, have been relaxed, allowing for a maximum 10 percent of a fund's portfolio to be placed in direct investments in China's A shares (renminbi-denominated shares now open to select qualified foreign institutional investors). However, because Taiwan and China have not yet signed a memorandum of understanding on cross-strait financial cooperation and supervision, that 10 percent can only be invested in A50 China-tracking exchange traded funds (ETFs).

Consequently, many Taiwanese investors have preferred to purchase Hong Kong-listed A50 ETFs or even "purer" Chinese funds, either through Taiwanese brokerage firms or by directly opening accounts in Hong Kong. 

Another renminbi-denominated asset target being chased by Taiwanese capital is real estate in the Greater China region.

JPMorgan Asset Management (Taiwan) Limited vice president Wei Ru-hong, who has just returned from a fact-finding trip in China, says that in the wake of the recent real estate market adjustment, property prices are once again heating up in areas such as Beijing and Shanghai. 

Taiwanese Jump into Real Estate Battle

In Beijing, for instance, the transaction volume of two leading real estate brokers – China Vanke Co., Ltd. and Soho China Ltd. – was up 50 percent in the first three months of 2009 compared to the same period last year and had returned to pre-subprime crisis levels. The inventory level (defined as the amount of time it would take at current transaction rates to unload existing properties) in first-tier cities such as Shanghai, Fuzhou, and Chongqing has fallen from a historical high of 40 months in 2008 to 12 months in 2009.

Wei believes that as transaction volume expands, China's real estate prices will gradually halt their decline and rebound.

One executive at Jones Lang LaSalle China believes there is renewed interest among Taiwanese investors in China's real estate market, judging by the several Taiwanese delegations that attended the recently concluded 2009 Beijing Spring Real Estate Trade Fair. The interest remains tepid, however. Some Taiwanese visitors concluded deals, but the majority elected to stay on the sidelines.

One issue of interest to Taiwan's investors is China's major shift in real estate policy. Having restricted foreign investment in the sector in the past, Beijing is now considering easing restrictions on investment in Chinese property by foreign institutional investors and even thinking of launching real estate investment trusts (REITs) to help rescue the real estate market.

Oliver Farnworth, Deloitte Touche Tohmatsu's tax principal and real estate fund specialist for China, predicted in a recent report that if related policies continue to be liberalized, it will encourage foreign institutional investors to enter China's property market, increasing financing and liquidity alternatives and improving market sentiment.

It remains unclear, however, if China's real estate sector is truly on the rebound. Research organizations diverge widely on the issue because the situation varies tremendously throughout the country, but they generally acknowledge that vacancy rates are still generally elevated.

Experts, therefore, recommend that Taiwanese investors proceed with caution unless they are thoroughly familiar with local conditions or need to buy a place to live in. In its latest report on China's economy, Morgan Stanley described the country's real estate market as the world's last bubble in the process of bursting. As if anticipating the trend, the investment firm has sold a number of commercial properties it owned in China since the middle of last year.

The turbulence in China's stock market and uncertainty over whether its real estate sector is on the way up or down have driven many Taiwanese investors to simply invest in the Chinese currency. They hope that by holding time deposits and other renminbi-denominated fixed income instruments, they will establish a position in renminbi assets, leaving them ready to pounce on good investment opportunities.

Because China still tightly regulates capital inflows and outflows, the most popular way for Taiwanese to hold renminbi assets is to go to Hong Kong and open renminbi accounts by converting foreign currency holdings into the Chinese currency.

From Ben Franklin to Mao Zedong

Nicholas Kwan, regional head of research for Asia at Standard Chartered Bank (Hong Kong) Limited, said that last year in July and August when the U.S. dollar depreciated substantially, many Hong Kong residents rushed to convert their Hong Kong dollar savings into renminbi. Renminbi deposits in Hong Kong banks swelled, but have since gradually fallen off as the greenback has picked up strength. (Table 1)

But now, with Hong Kong hoping to liberalize renminbi loans and other renminbi-based services, interest rates paid on renminbi deposits are likely to rise, and could even exceed those in China. Kwan predicted that a new wave of renminbi deposits would hit Hong Kong beginning in March and April.

This new wave of exchanging "Franklins" for "Mao Zedongs" is different from last year's fad, however, in that it is being led by Taiwanese and investors from other countries, observes the vice president of one foreign investment bank.

"Everybody thinks that the U.S. dollar will depreciate in the future, and therefore the demand for hedging instruments is soaring. If Hong Kong gradually liberalizes renminbi investment tools, renminbi deposits could grow by more than 50 percent in the coming year," the banker said.

Aside from renminbi, Chinese government-issued bonds could also become a hot commodity.

From the beginning of this year, China has planned to expand debt issues in Hong Kong to an estimated scale of 50 billion to 100 billion renminbi, two to four times the amount currently in circulation. Furthermore, some of this debt could include Chinese government bonds. At present, corporate bonds issued in Hong Kong by Chinese financial institutions pay an average 2.5 percent to 3 percent in interest, which is higher than the interest paid on Taiwan-dollar time deposits.

As a consequence, Hong Kong's renminbi bond market has become a new focus of Taiwanese investors.

JF Asset Management's Wang states unequivocally that China's renminbi is more stable or even more likely to appreciate in value than other Asian currencies. With global exchange rates fluctuating rapidly and the world's economic outlook unclear, he sees it as an attractive option. He also reminds Taiwanese investors, however, that the renminbi is not internationally convertible and is no longer "sure to appreciate, not depreciate" as had been speculated in the past. He suggests renminbi holdings be held to hedge risk rather than as a speculative investment and should not be weighted heavily in investors' portfolios.

Experts suggest that unless Taiwanese investors trade with China or need the currency to meet work or study requirements, the renminbi should not account for more than 10 percent of their assets to avoid excessive exchange rate and liquidity risks.

Translated from the Chinese by Luke Sabatier