1HSBC’s Emerging Markets Currency Guide 2011Emerging MarketsJanuary 2011
The regulatory environment for currencies is in a state of flux. Over the last three decades the heightenedmovement of capital across borders has been a linchpin of globalisation. Now, however, this regulatoryshift toward liberalisation is reversing. Mercantalism, a desire for relatively balanced growth (forcommodity exporters at least), and a general distrust of markets heightened by the financial crisis havegenerated a broader reassessment of the appropriateness of capital controls. This tilt towards moreregulation will vary across countries and over time. In fact some countries, such as China and India, arecontinuing to liberalise. The increased legitimacy of regulation, however, is here to stay. Witness theactions of Brazil, Chile, Indonesia and Thailand, among others. The ongoing surge of capital from theHIICs (highly indebted industrial countries) into emerging markets is generating policy responses thatinvestors cannot ignore.
Emerging Markets now a mainstream consideration
This capital reallocation itself implies that emerging market currency regulation is now a mainstreamconsideration. Flows into emerging market fixed income and equities were the largest on record in 2010by quite some margin. In 2011, on the basis of HSBC forecasts, emerging markets will comprise morethan half of the growth in global household spending, and fully two-thirds of the increase in globalphysical investment. With economic growth and investment returns in the HIICs likely to be impaired formany years, emerging markets offer the best, or perhaps only, prospect of sustained performance.
New markets are developing
For the first time this year we have included a chapter on a new currency — the offshore renminbi.Strictly speaking this is not a new currency — it is the same currency as is traded onshore in China. It is,however, traded in a separate market in Hong Kong with its own particular regulatory structure andparticipant sphere, and at a different rate from onshore. Importantly, any corporate entity globally cannow freely access China’s currency.This CNH market did not exist when we published last year’s document; now, it turns over as much asUSD500m per day. Integral to the growth of this market, RMB bank deposits in Hong Kong have almostquintupled to USD42.4bn, from just USD8.9bn a year ago. Furthermore, CNY denominated bonds issuedin Hong Kong now total USD9.5bn. Fully 67% of the value of CNY bonds issued in Hong Kong since1997 has been issued since 2010 when the CNH market came into existence. No doubt these numbers willlook very modest when we publish next year’s update.We hope you find this year’s Emerging Markets Currency Guide useful.
Emerging Markets FX:
Regulation more crucial than ever