ABC of RMB products
What is a renminbi product?
A renminbi product is a generic term which may include a wide range of investment products denominated or settled in renminbi or have exposure to renminbi-linked assets or investments.
If I invest in renminbi products, will I be exposed to currency risk?
In general, a non-Mainland (including Hong Kong) investor who holds a local currency other than renminbi will be exposed to currency risk if he/she invests in a renminbi product. This is because renminbi is a restricted currency and subject to exchange controls, you may have to convert the local currency into renminbi when you invest in a renminbi product. When you redeem / sell your investment, you may also need to convert the renminbi received upon redemption / sale of your investment product into the local currency (even if redemptions / sale proceeds are paid in renminbi). During these processes, you will incur currency conversion costs and you will also be exposed to currency risk. In other words, even if the price of the renminbi product remains the same when you purchase it and when you redeem / sell it, you will still incur a loss when you convert the redemption / sale proceeds into local currency if renminbi has depreciated.
Like any currency, the exchange rate of renminbi may rise or fall. Further, renminbi is subject to conversion restrictions and foreign exchange control mechanism.
If I invest in renminbi products, does it mean that I will always receive renminbi upon redemption / sale of investments?
You should always understand the nature and terms of a product and read the offering documents carefully before investing to find out whether you will actually receive renminbi when you redeem / sell the renminbi products. Further, even if the product aims to deliver renminbi, it may not be able to pay you in renminbi if the product has to sell non-renminbi-denominated investments to meet your redemption / sale request, and encounters conversion restriction when converting the proceeds in non-renminbi currencies into renminbi. On the other hand, even if the investments are denominated in renminbi, there may not be sufficient renminbi to satisfy the redemption / sale requests due to the repatriation or other controls on renminbi. As a result, you may not receive renminbi when you redeem / sell your investments.
Hong Kong Exchanges and Clearing Limited (HKEx) has launched the Renminbi Equity Trading Support Facility (TSF) to enable investors to buy renminbi-traded shares, exchange traded funds (ETFs) with equities as underlying and real estate investment trusts (REITs) in the secondary market with HK dollars. However, you should note that it is a key feature of the TSF that only HK dollar is accepted for the purchase of eligible renminbi securities and only HK dollar is allowed to be paid as sale proceeds for the sale of those renminbi securities. You should check with your brokerages or banks the relevant terms, fees, operation flow and agreement that need to be signed for using the TSF.
For details about the TSF arrangement and the list of securities supported by the TSF, please refer to HKEx's website.
Is there a liquid secondary market for renminbi products?
As renminbi products are a new type of product, there may not be any secondary market for these products. You should check with your investment adviser or seek professional advice to find out if there is any secondary market for the renminbi product you plan to invest in and its liquidity. You should also find out whether the renminbi product is subject to any lock-up period or heavy penalty or charges for early surrender or termination of the product. Always consider carefully your own liquidity needs before committing to any investment.
What other risk factors should I consider when investing in renminbi products?
Investment / market risk: Like any investments, renminbi products are subject to investment risk and may not be principal protected i.e. the assets that the products invest in or referenced to may fall as well as rise, resulting in gains or losses to the product. This means that you may suffer a loss even if renminbi appreciates.
Liquidity risk: Renminbi products are also subject to liquidity risk as renminbi products are a new type of product and there may not be regular trading or an active secondary market. Therefore you may not be able to sell your investment in the product on a timely basis, or you may have to sell the product at a deep discount to its value.
Issuer / counterparty risk: Renminbi products are subject to the credit and insolvency risks of their issuers. You should consider carefully the creditworthiness of the issuers before investing. Furthermore, as a renminbi product may invest in derivative instruments, counterparty risk may also arise as the default by the derivative issuers may adversely affect the performance of the renminbi products and result in substantial losses.
Currency risk: As explained in second question above, an investor is also subject to the risk of renminbi depreciation if he/she intends to convert any renminbi-denominated redemption / sale proceeds into another currency.
Depending on the nature of the renminbi product and its investment objective, there may be other risk factors specific to the product which you should consider. Before making an investment decision, always read the risk factors as set out in the offering documents and seek professional advice where necessary.
What should I consider before investing in renminbi products?
Like investing in any product, you should always understand the nature, investment objective, strategy, key features and risks of the renminbi products and assess whether these products are suitable for you in terms of your own investment needs and risk profile before you invest in the renminbi products. You should also understand that the renminbi products may not necessarily give you benefits to appreciation in renminbi (if any). Finally you may not receive renminbi upon redemption / sale of the renminbi products. Seek professional advice if in doubt.
How do I know if the product is suitable for me?
Before you make your investment decision, learn about the product features and know your investment objectives. In addition, according to the SFC's Code of Conduct, when SFC licensed persons and registered institutions solicit you or make a recommendation to you in relation to the product, they must ensure its suitability for you, taking into account your personal circumstances, such as financial situation, investment experience and investment objectives.
Can investors of a renminbi product make a claim against the Investor Compensation Fund (ICF)?
Presently, investors can make a claim against the ICF, if that renminbi product is traded on the Stock Exchange of Hong Kong or Hong Kong Futures Exchange, and the investors suffer pecuniary losses as a result of default, eg, misappropriation of that renminbi product held in the custody of a licensed broker firm or bank that provides securities and futures contracts trading services.