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With the launch of Shanghai-Hong Kong Stock Connect and the lifting of the daily conversion limit of renminbi (RMB) for Hong Kong residents, RMB investment is gaining more attention from investors with an increased and diverse range of product choices in the market.

RMB-structured products are among these offerings, but how much do you know about them? In general, a structured product is an instrument embedded with a derivative (note), under which the potential return and the amount due are linked to the performance of one or more underlying assets. Here are some things you need to know about this type of product.

Major risks involved in RMB products

In 2014, the RMB depreciated by 2.5% against the US dollar. This shows that the RMB can rise or fall, just like any other currency.

You will be exposed to currency risk if you need to convert the local currency into RMB when buying RMB products. During the conversion, currency conversion costs will also be incurred.

Depending on the nature of the RMB product, there may be other risk factors specific to the product which you should consider. These include liquidity risk, investment/market risk and issuer/counterparty risk. Learn more about the risks associated with investing in RMB products.

Specific risks involved in RMB-linked deposits

Many of the existing RMB products offered by banks are RMB-linked deposits. A currency-linked investment product is not equivalent to a time deposit. Also, depending on the terms of the individual product, it might not be principal-protected. You should be aware that you could lose all your money in the worst-case scenario.

RMB-linked deposits may offer a higher-interest return compared to time deposits, but they also carry certain risks, including the following:

  • Not protected by Deposit Protection Scheme

    RMB-linked deposits are not equivalent to RMB time deposits and are not protected by the Deposit Protection Scheme, which protects depositors by paying them compensation in the event of the failure of a bank which is a member of the Scheme. Also, investing in an RMB-linked deposit product is not equivalent to buying the currency directly. In fact, it is a structured product that is embedded with derivatives (eg RMB options).

  • Currency risk

    The upward or downward movement of RMB exchange rate will affect your final return. If the exchange rate of RMB goes against your expectation, the consequential potential loss may offset (or even exceed) the potential gain, ie the interest received. Besides, RMB-linked deposits are often based on the exchange rate of offshore RMB (known as “CNH”) in Hong Kong. While both onshore RMB (known as “CNY”) and offshore RMB represent the same currency, they are traded in two markets which are affected by factors that are not exactly the same. They do not necessarily have the same exchange rate and their movements may not be in the same direction.

  • Market risk

    The return of RMB-linked deposits depends on RMB exchange rate. The exchange rate of RMB is affected by a number of market factors, including the macroeconomic trends and latest policy developments in mainland China.

  • Maximum potential loss

    The maximum potential gain of a RMB-linked deposit product is capped at the pre-determined interest rate, but the amount receivable at maturity will be determined by the market exchange rate between the deposit currency and the linked currency in comparison with the pre-determined conversion rate.

    Types of
    RMB-linked deposit
    If the market rate of RMB moves in line with your expectation
    If the movement of the RMB exchange rate goes against your expectation
    Principal-protected RMB-linked deposit Receive principal plus the potential interest (both in deposit currency) Receive principal plus the minimum interest (if any) (both in deposit currency) The principal protection feature will only apply if the product is held until maturity. You may suffer loss if the issuer becomes insolvent or in default.
    Non-principal-protected RMB-linked deposit Receive principal plus the potential interest (both in deposit currency) Receive both principal and interest in the linked currency at the pre-determined conversion rate, which may be less favourable than the market rate If the movement of the RMB exchange rate goes against your expectation, you may lose all your money in the worst scenario.
  • Liquidity risk

    Generally, you cannot terminate the product before maturity.

Other RMB structured products

Besides RMB-linked deposits, there are other RMB-structured products, such as equity-linked investments denominated in RMB or linked to RMB-traded stocks, etc.

When investing in these products, you should be aware that in general, the potential return of such products will be determined by, among other things, the price of the relevant reference asset on the maturity/expiry date and the exchange rate of offshore RMB. You will also be exposed to other risks such as a limited pool of RMB outside the mainland China and fluctuations in the offshore RMB interest rate. In general, the maximum potential gain may be capped but you may lose your entire investment in the worst case scenario.

Know your rights and responsibilities

Make sure you read the offering documents of RMB investment products which include information explaining the key features and risks of the products.

Banks that issue and sell currency-linked investment products (including RMB-linked deposits) are required to provide concise and easy-to-understand “Important Facts Statements” to help consumers better understand the essential information including key product features and risks. You should read these documents carefully before making any investment decisions.

As with any product, you must make sure you understand the nature, investment objective, strategy, key features and risks of the products and assess whether these products are suitable for you in terms of your own investment needs and risk tolerance. If you have any questions about the product, consider getting advice from your intermediaries or financial advisers before making any investment.

NoteA derivative is a financial instrument whose value and return depend on the performance of its underlying asset, such as a stock, an index or a commodity. Warrants, futures and options are common types of derivatives.