Offshore investors have bought nearly $2 billion of yuan-denominated bonds so far in 2013, up by over 70% on 2012. These RMB bonds, known as “dim-sums” are really starting to add up.
Is your firm already trading dim sum bonds, or looking to take part in this market?
Participants should be aware that the Chinese renminbi has both an onshore and an offshore version and they are not at par with each other – there is an explicit FX rate difference between the two currencies.
The onshore currency code is CNY. Renminbi CNY can only be used in mainland China where the market participants trade and settle domestically. The
offshore renminbi currency convention is CNH.
However, the offshore renminbi (CNH) is not registered as a currency in the International Organisation for Standardisation (ISO). With no ISO registration CNH can’t be settled in its own right, since if the code isn’t on the official list, then it isn’t
used in the market-wide messaging infrastructure.
So here’s where it gets ‘interesting’. When trading and settling offshore, the CNY currency code is used – but trade participants need to understand it
actually represents the CNH currency.
Therefore, when trading, instructions will go out to the settlement agent in CNY. The settlement agent will send instructions about settlement and nostros back to the counterparties in CNY – but it
actually means use the offshore version (CNH). It says one thing and means another!
Operations functions such as settlement and nostro reconciliation may choose to accept this set up, but other functions (such as Finance and Risk) may not appreciate the impact.
Assets will be marked as CNY when the real currency is CNH. Functions such as trade and position valuation and risk calculation would be reflected as CNY. The firm’s balance sheet would reflect CNY when it’s actually CNH. Any reporting to an external
regulator would therefore reflect the onshore CNY. Depending on the size of the position held, this could lead to a misrepresentation of risk and reporting numbers. In extreme cases, the misrepresentation could mean that the organisation is in breach of industry
If your firm is buying or selling and settling dim sum bonds in any location outside of China, then this scenario will need to be understood or managed across trading and the many support functions, since in effect CNY and CNH are two separate currencies
with different values.