Credit and liquidity conditions should remain robust in 2013, but the rising popularity of alternative sources of financing poses increasing risks 

China’s new five-year plan for the financial sector pledges to push forward with the liberalisation of interest and exchange rates, as well as capital account convertibility

On April 18, HSBC launched its first ever offshore renminbi (CNH) bond to be listed on the London Stock Exchange in a move designed to help boost the City’s role as the next major CNH hub after Hong Kong. The bank announced the move shortly before UK chancellor George Osborne publicly stated that the UK government intends to transform London into a western hub for trading and settling in the Chinese currency. These developments will, at the very most, give investors outside the Asia region greater exposure to CNH-denominated assets offshore. However, we believe that the immediate impact will be minimal.

What happened: HSBC (HSBA:LSE/ 0005:HKG) has raised an impressive Rmb2bn ($300m, £197m, €240m) via its first offshore renminbi (CNH) bond targeted primarily at European investors. The bank said it priced its three-year deal at a 3% yield, closing with a book order twice the initial issue size, with more than half the deal placed into European accounts. The bond will be listed on the London Stock Exchange.

Implied interest rates in the offshore renminbi (CNH) forwards market rose sharply on Monday 16 April, after the People's Bank of China had, two days previously, announced a widening of the band within which renminbi may trade. This suggests that there is less scope for further appreciation of renminbi (and, therefore CNH) in coming months relative to the last two years. The widening of the band is, therefore, yet another factor which will reduce the demand for CNH deposits in Hong Kong, and curtail the availability of liquidity in the embryonic markets for CNH-denominated assets in the Special Administrative Region. It is, therefore, easy to see why the costs of funding in CNH through Hong Kong will be higher in the coming months than they are currently.

Approval of a pilot financial reform zone in Wenzhou suggests that the government has finally acknowledged the importance of private capital to the nation’s financial health and is prepared to encourage it to play a bigger role.

More and more foreign issuers are expected to tap the offshore renminbi (CNH) 'dim sum' bond market this year thanks in part to favourable rates in Hong Kong's rapidly-growing cross-currency swap market. We believe that issuance by foreign issuers will be strong if liquidity in both these markets continues to grow, and US$/CNH cross-currency swap rates continue to rise faster than 'dim sum' bond yields.

Data from the People's Bank of China (PBOC) published today shows a $20.6bn, or 0.6 %, fall in China's official foreign exchange reserves which slipped to $3.18tn in 4Q11. A fall in reserves in both November and December represents the first consecutive monthly fall since the first quarter of 2009. We think the figures show continued outflows of "hot money" and raise pressures for a further easing in domestic liquidity.