Overview of Offshore RMB

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1 Overview of Offshore RMB Jaunary 214 Lee Beng-Hong Head of Markets, China

2 Macro background Liberalization of RMB China fully liberalized the use of RMB for cross border trade settlement in March 212 close to 3 years after introducing RMB cross-border settlement pilot program in 29 Most capital account controls have been gradually liberalized on a quota basis. China has the basic framework in place to increase the degree of foreign ownership via the existing schemes Capital account items Current account items Portfolio flow Reserve flow Interbank flow Corporate investment flow Corporate cross border loan Current Account Capital Account QDII, RMB QDII ODI RMB loan FDI QFII RMB QFII RMB cross border trade settlement for all transactions (including RMB merchandize cross border trades, lending service trades and other current account items) by all eligible enterprises, both exporters and importers (Mar 212) QFII (Nov22), RMB QFII (Dec211), QDII (Jun26), RMB QDII (Aug213) Bond investment quota for reserve managers Banks are allowed to borrow (subjected to foreign debt quota) and lend RMB to offshore entities RMB ODI (Jan11), RMB FDI (Oct11) Corporate allowed to lend to offshore related entities (Jul 213) Source: China 1

3 Offshore RMB Key developments in the CNH market First Stage: Feb 24 May 27 Banks allowed to take RMB deposits and to conduct conversion for individuals capped at RMB 2, per day in HK Banks started to earn 86.5bp deposit rate from Shenzhen branch of PBoC, after clearing charge from the clearing bank BOC (HK) Retail customers received RMB deposit rate at the 4-7bp range Second Stage: Jun 27 Jun 21 Corporates allowed to issue RMB bonds in HK Attractive yield (3.%-3.5%) for both retail customers and deposit taking banks Sharp increase in RMB deposit base in early 28, driven by the anticipation of CNY appreciation (12% appreciation priced into 12-month NDF) Third Stage: July 21 onwards Retail 1 week investors allowed to transfer RMB deposits to other bank accounts and corporates allowed to setup RMB accounts in HK Creation of CNH FX and rates inter-bank markets. RMB supply due to spot CNY-CNH arbitrage from exporters, and sharp increase in HK-China crossborder settlement amount Increased issuances of RMB bonds and CDs RQFII quota increased from RMB 2bn to RMB 27bn MNCs allowed to make RMB cross border loans CNH refers to the Chinese RMB circulating in offshore markets, including but not limited to Hong Kong In July 21, the People s Bank of China made significant relaxations to the rules for the RMB business in Hong Kong, allowing RMB to circulate more or less freely in Hong Kong and permitting CNH financial products Unlike China onshore RMB, client can do FX conversion freely on the CNH market. Current account items include merchandize trades, service trades and other current account items Current account items: development on RMB cross-border trade settlement schemes from 29 to 212 July 29 RMB Cross-Border Trade Settlement Scheme launched The RMB cross border trade settlement scheme was launched and initially in the pilot program there was a total of 365 enterprises (Mainland Designated Enterprises- MDE) who were permitted to settle merchandise exports in RMB till Aug 211 Expanded Scheme The RMB x-border settlement program has been expanded a few times and by Aug 211, the RMB cross border settlement program was expanded nation-wide and to all countries/regions abroad, RMB trade settlement applied to merchandize and services imports and services exports; for merchandize exports, only MDEs were eligible and the list of MDEs had yet to be expanded. Mar 212 Full relaxation Following the announcement of the Notice of improving the administration of Mainland Designated Enterprises in RMB cross border trade settlement, RMB cross border trade settlement scheme is now applicable for all transactions under the current account by all eligible enterprises, both exporters and importers Source: DB Global Markets 2

4 Offshore RMB Key developments in the CNH market ( Continued) In 213 Introduction of RMB clearing in Taiwan and Singapore Introduction of O/N liquidity Facility in Hong Kong and Singapore Relaxation of documentation check for cross order RMB payments/receipts Relaxation of corporate cross-border RMB guarantee Relaxation of corporate RMB offshore loans Expansion of RQFII from HK to Taiwan, London and Singapore In 214 Relaxation of FX conversion quota Source: DB Global Markets 3

5 Rapid Growth in CNH Market RMB trade settlement is 17% of China s global trade in 213 RMB Liquidity in HK 18% 16% 14% 12% 1% RMB trade settlement (RMB bn) RMB trade settlement as share of China's global trade RMB Deposit base CNH CDs 8% 2 4 6% 4% % % Jul-9 Jul-1 Jul-11 Jul-12 Jul-13 Source: HKMA,, Bloomberg Source for all graphs: Research, CEIC, Bloomberg Finance LP, SWIFT 4

6 Rapid Growth in CNH Market Monthly change in RMB deposits vs. RMB crossborder settlement (RMB bn) Total offshore deposit (RMBbn) Hong Kong Taiw an Singapore M acao London New York 1 8 Hong Kong Macao Taiwan RMB cross border settlement (rhs) Source for all graphs: Research, PBoC, HKMA, CBC, and various central bank sources 5

7 Rapid Growth in CNH Market Offshore RMB fixed income market now at RMB 513bn Bond Outstandinbg CD Outstanding 6 The MoF 4th offering of 23bn benchmark bonds 5 4 NDRC announced guideline on offshore RMB bond issuance regulation by domestic corporations The MoF 5th offering of 13bn benchmark bonds PBoC allowed domestic FI to issue RMB debt in HK HK corporations and HK financial institutions with significant mainland operations to issue RMB debt in HK MOF debut offering of RMB 6bn benchmark bonds Allow domestic corporations to issue CNH bonds, and set the annual quota at RMB 5bn in 211, evenly split between FI and corporations MOF 2ndoffering of RMB 8bn benchmark bonds The MoF 3rd offering of 2bn benchmark bonds and assured the benchmark issuance as a long term arrangement by the central government Jun-7 Jun-8 Jun-9 Jun-1 Jun-11 Jun-12 Jun-13 Source: 6

8 Rapid Growth in CNH Market Net supply in CNH fixed income market (RMB bn) Gross issuance by tenor Source for all graphs: Research, PBoC, HKMA, CBC, and various central bank sources M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 1Y 15Y 2Y 3Y 7

9 Rapid Growth in CNH Market RQFII program expanded to more offshore RMB centres RMB QFII quota approval QFII quota approval slower than in RQFII approved quota monthly, CNY bn Cumulative quota granted CNY bn, rhs Annual QFII quota approval (USDbn) to Nov Source:, CEIC 8

10 Offshore RMB Current CNH market instruments USDCNH Average Trading Size Tenor Bid/Ask Spread Average Daily Volume Spot USD3-5m - 3-1pips USD2.5 3.bn Forward USD5m (1-3m) USD2m (6-12m) t/n 1 year Option USD2-3m 1m up to 2 years IRS Early Stage Liquidity up to 3 yrs 3-8pips (1m) 1-3pips (3m) USD2-3bn (1-3m) 3pips (6m) USD1-1.5bn (6-12m) 5pips (1y).5vol (3m).4vol (6m) USD3m.3vol (1y).75vol (2y) - - CCS USD1 2m Up to 5 yrs 5-8bps USD8-15mn Money Markets CNH5 2m Short Tenor (3m) 5-7bps In small volumes Bonds CNH1m Up to15 yrs 1-2bps CNH1-15m CDS Source: Bloomberg 9

11 Offshore RMB A comparison between onshore and offshore products CNH Market CNY Market CNO Market Offshore Deliverable RMB Onshore Deliverable RMB Offshore Non-Deliverable RMB Spot USD4.bn daily trading volume USD35bn daily trading volume Not applicable Forwards / FX Swap USD1-2bn daily volume. DB can provide liquidity up to 1 years USD 5-1bn daily trading volume, up to 5 years Non-deliverable forward (NDF) / Nondeliverable Swap (NDS) USD2.5bn daily trading volume, up to 5 years FX options Getting more active in trading, tightest at 1year Very early stage, but strong moment Actively traded FRAs May start trading soon Very illiquid Very illiquid Interest Rate swaps Corporate starts to use CNH IRS to hedge their RMB liability interest rate risk Actively traded. Available as Repo IRS, Shibor IRS, Depo IRS etc. Actively trade by financial institutions Cross currency swaps USD 1-2bn per month, mostly at 2Y tenor but liquidity is available up to 5Y. Liquidity likely to improve further as more longerdated bonds are issued CCS is allowed to be traded by Corporate for hedging purpose. Liquidity is available up to 5 years Non-deliverable CCS, actively traded Structured products CNH market can offer a variety of structured products which are linked to FX and interest rates CNY option and Risk Reversals can be traded by Corporate CNO market can offer a variety of structured products which are linked to FX and interest rates Source: DB Global Markets Structuring 1

12 Development in CNT market RMB Clearing January 25th, PBoC and Bank of China, Taipei branch signed RMB Clearing Agreement January 28th, CBC approved Bank of China, Taipei branch to be the RMB Clearing Bank in Taiwan Feb 5th, 46 banks (DBUs and offshore financial institutions) signed RMB Clearing Agreements and opened clearing and settlement accounts with Bank of China, Taipei Feb 6th, RMB business in Taiwan was officially launched and RMB deposits on the first day reached RMB 1.3bn As of the end of June, 6 DBUs and 55 OBUs offered RMB business with a total deposit of RMB 71.2bn RMB Regulation Daily buy/sell RMB limit for Taiwan residents (Natural Person) at RMB 2, at the USDCNY spot; Daily RMB remittance limit by Taiwan residents (Natural Person) to Mainland China at RMB 8,; No restriction on RMB Net Open Position.125% reserve requirement for RMB deposits (treated as FX deposits) in Taiwan; No RMB emergency liquidity facility yet in Taiwan RQFII program for Taiwan institutions; Fungibility with CNH market Full fungibility between CNT and CNH liquidity because; No restriction on RMB flows between CNT and CNH markets; Banks in both markets have access to the onshore USDCNY exchange rate window for trade related RMB transactions; CNT interbank and deposit rates Three factors determining the level of CNT interbank and deposit rates: PBoC's base rate: PBoC pays.72% p.a on offshore RMB deposits held by the Clearing Banks, BOC HK pays.629% to RMB participating banks which maintain RMB deposits with BOC HK, while BOC Taipei pays.648% (after deducting 1% withholding tax) to banks in Taiwan who maintain RMB deposits with it. I think the slight basis between the RMB deposit rates by BOC HK and BOC Taipei reflects the difference in operating costs/taxes at these two locations and is negligible; these rates (.629% or.648%) serve as the floor of offshore RMB deposit and interbank rates; Interest rates on the CNH market -- such as FX implied yields, CNH interbank rates (TMA offers daily fixing); Interest rates on the onshore CNY market given offshore banks have the alternative to transfer funds to onshore through MCBs. Market activities FX market: Low transaction volume during the first few trading sessions; we estimate so far roughly USD 5mn has been traded in the spot market, DF only trades up to 1M with less than USD 5mn volume, and NDF volume is less than USD 1mn; Basis risk in CNT spot and DF pricing vs. CNH market has been limited. Bond market : ChinaTrust commercial bank is reportedly looking to debut a 2-5Y tenor, up to RMB 1bn Formosa bonds (RMB bonds in Taiwan). A few global banks are competing to tap the Formosa bond market as soon as possible. Access to onshore CNY capital market: Possible investment venue to the CNY market by Taiwan institutional and retail investors such as onshore RMB interbank bond program, RMB QFII or QFII 2 (for retail investors) programs are under discussion, and likely will be finalized in H1 this year. This means currently there are fairly limited investable RMB assets in Taiwan and most investors put RMB liquidity to work in the CNH bond market. Other RMB financial products: There was one RMB fund launched by a local mutual fund and four insurance companies began to underwrite RMB insurance policies; 11

13 Development in CNS market RMB Clearing On February 8th, PBoC appointed the Industrial and Commercial bank of China (ICBC) Singapore branch as the clearing bank for RMB in Singapore. MAS granted ICBC Singapore Qualifying Full Bank status effective on October and authorized ICBC Singapore as the RMB Clearing Bank. MAS indicated it will work closely with PBoC and ICBC to implement the RMB clearing arrangement in Singapore. Having a RMB Clearing bank in Singapore will open another window for Singapore financial institutions to tap directly the USDCNY market for RMB supply, instead of relying on BOC HK or via MCBs for RMB cross border trade related settlements, this should greatly facilitate the use of RMB in south east Asia. Key performance indicator forecasts, 214 RMB Regulation MAS has doubled its RMB cross currency swap line with PBoC to RMB 3bn. MAS signed MOU on RMB business cooperation with PBoC, the two central banks will establish regular dialogue to review RMB liquidity conditions and discuss issues concerning the stability of the RMB market; RQFII program is made available to institutional investors in Singapore and London etc. CNS deposit growth projection We estimate there is about RMB 8-9bn deposits in Singapore. Data Forecast RMB appreciation 2-3% RMB cross border trade settlement RMB 6trn or 2% of China's global trade volume Average daily FX trading volume USD 4-4.5bn spot, USD7-7.5bn fwd, USD 5bn CCS, USD7-8bn FX options RMB net bond supply CNH Bond Total Return Forecast RMB 3bn 3.75% (CNH); %(USD) 12

14 Key Forecast for 214 Key performance indicator forecasts, 214 Data Forecast RMB appreciation 2-3% RMB cross border trade settlement RMB 6trn or 2% of China's global trade volume Average daily FX trading volume USD 4-4.5bn spot, USD7-7.5bn fwd, USD 5bn CCS, USD7-8bn FX options RMB net bond supply CNH Bond Total Return Forecast RMB 3bn 3.75% (CNH); %(USD) 13

15 RMB Clearing Systems Offshore Correspondent Banks BOC TP BOC HK ICBC SG Offshore China BOC SH ICBC SH MCB *Clearing Bank PBOC 14

16 Increase in Investor Access Openness of Capital Markets (29-211) RMB QFII quota approval RQFII approved quota monthly, CNY bn Cumulative quota granted CNY bn, rhs

17 Investment Channels for Foreign Investors to Access China Market Snapshot QFII Scheme RQFII Scheme China Interbank Bond Market (CIBM) Launched in Nov2 Launched in Dec11 Launched in Aug1 Eligible applicants: - Fund mgt co.; Insurance companies; Securities companies; Commercial banks; Others (incl. pension fund, charity fund, endowment fund, trust companies and government investment agencies) that meet certain criteria as below: Eligible applicants: HK: - HK subsidiaries of Chinese fund mgt co, securities co., commercial banks, insurance companies, etc., - Financial institutions registered and with primary business operating in HK; with Type 9 license granted by HK SFC and started asset management business Eligible applicants: Foreign central banks/monetary authorities, RMB clearing banks in HK and Macau, offshore RMB trade settlement banks, offshore insurance companies, QFIIs, RQFIIs Investment scope: All instruments traded in the inter-bank bond market, but can only engage in outright transactions. Taiwan, Singapore, London, etc.: to be announced by CSRC. Investment scope: same as QFII s. Investment scope: All on-exchange traded instruments, IPO subscription of shares and convertible bonds, additional issuance, rights issues, mutual funds, index futures and bonds traded in interbank market. Market Status Total market quota: USD15bn (USD47.493bn been allocated) 24 QFIIs received QFII license and 216 QFIIs received QFII quota (as of Sep13) Total market quota : - HK: RMB27bn (RMB134.3bn been allocated) - UK: RMB8bn - SG: RMB5bn Total approved RQFIIs: - HK: 51 (as of Sep13) 7+ foreign institutions have been approved 16 16

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