FTSE BOCHK Offshore RMB Bond Quarterly Research Report

Transcription

1 Insights FTSE BOCHK Offshore RMB Bond Quarterly Research Report An Examination of the Offshore RMB Bond Market ftserussell.com January 2016

2 FTSE BOCHK Offshore RMB Bond Quarterly Research Report An Examination of the Offshore RMB Bond Market Highlights In November, the IMF selected the renminbi (RMB) as its fifth reserve currency for the Special Drawing Rights (SDR) currency basket, marking an historic milestone for China. The move may draw between 4 trillion RMB and 7 trillion RMB into Chinese assets over five years, half of which will come from reserve managers, according to Standard Chartered Plc. 1 Despite the SDR inclusion, market expectations for the RMB have slid since August when China s policymakers allowed the currency to depreciate nearly 2 percent against the U.S. dollar. Some analysts predict the RMB will weaken 5.1 percent to 6.73 per dollar by the end of 2017, according to the median estimate in a Bloomberg survey. 2 At the same time, RMB internationalisation is still accelerating. The People s Bank of China (PBOC) reports that 27 percent of China s trade was settled in RMB in the first nine months of the year, compared with 22 percent for all of The Ministry of Finance auctioned 14 billion RMB ($2.2 billion) of dim sum bonds during the last week of November alone. The yield on offshore RMB securities due 2025 was 3.51 percent on December 31, 68 basis points higher than debt of the same maturity in Shanghai. 4 1 Bloomberg; Financial Times. November Bloomberg. November Reuters. November Bloomberg. January Overview RMB expectations slide as money managers see continued risks in China s growth trajectory while RMB internationalisation continues apace with SDR inclusion The IMF s recent selection of the RMB as its fifth reserve currency is a significant milestone in China s financial reform drive. Yet a range of market participants remain concerned about the Chinese government s ability to navigate the complex matrix of challenges brought by financial reforms, and are moderating FTSE Russell FTSE BOCHK Offshore RMB Bond Quarterly Research Report 2

3 their views of China s growth potential in 2016 despite the RMB s increasingly high-profile role in the international financial system. Moving into a new year, some market participants predict the RMB will continue to lose value against the U.S. dollar in 2016 as confidence in the U.S. economy rebounds on the back of the Fed s first interest rate hike in nearly a decade in mid-december. Certainly, the bearish outlook for the RMB has gained momentum since August , when Chinese policymakers allowed the RMB to depreciate by 1.86 percent against the U.S. dollar, and as China enters a slower albeit more stable growth phase. 5 The currency may weaken 5.1 percent to 6.73 per dollar by the end of 2017, according to the median estimate in a Bloomberg survey. 6 In recent months a few high-profile money managers have made the media rounds, declaring expectations of further RMB devaluation. Some market participants predict China will eventually devalue the RMB by at least 30 percent 7 as the world s second largest economy continues to liberalise interest rates, restructure its banking sector, and above all, shift from an investment and exportled economy to one driven by domestic consumption. Despite this modified outlook for the RMB, the IMF s inclusion of the currency in its SDR basket is a significant political and economic milestone for Chinese policymakers, and may create more demand for the currency and RMB denominated assets such as dim sum bonds over the long term. 8 Indeed, the IMF s decision is a strong vote of confidence that China s currency is now one of the most significant barometers of value in the global economy. Yet, the short-term impact on the RMB of the SDR decision is likely to be modest, despite its positive long-term implications. On the one hand, inclusion in the SDR may draw between 4 trillion RMB and 7 trillion RMB into Chinese assets over five years, half of which will come from reserve managers, according to Standard Chartered Plc. On the other hand, if China s currency were to constitute up to 10 percent of the SDR basket, then reserve managers would need to buy US$28 billion worth of RMB 9 a modest amount when compared with the daily onshore spot market, which averages US$20 billion on a daily basis. 10 Even so, RMB internationalisation is continuing apace into 2016 inclusion in the SDR will require China to further liberalise access to its domestic markets at the global level, creating deeper and more transparent pools of liquidity for market participants and reserve managers. To that end, more trade is now settled in RMB, additional RMB investment schemes targeted at international market participants are coming online, and dim sum issuances are hitting the market, albeit at lower volumes compared to previous years. 11 The People s Bank of China (PBOC) reports that 27 percent of China s trade was settled in RMB in the first nine months of the year, compared with 22 percent for all of At the same time, the Ministry of Finance auctioned 14 billion RMB ($2.2 billion) of dim sum bonds in the last week of November alone. However, recent market turbulence and China s broader macroeconomic slowdown have affected the cost of raising funds offshore. The yield on offshore RMB securities due 2025 was 3.51 percent on December 31, 68 basis points higher than debt of 5 BOCHK Asset Management. September Bloomberg. November Bloomberg. November Bloomberg; Financial Times. November Bloomberg; Financial Times. November Reuters. November FTSE Russell FTSE BOCHK Offshore RMB Bond Quarterly Research Report 3

4 the same maturity in Shanghai 13, forcing the government to pay a premium for offshore fund raising. Lastly, international issuers are gaining access to cheaper so-called Panda bonds foreign issues in mainland China as China continues to open its domestic debt markets. The Panda bond market has sparked debate among some market participants, who are questioning the future of dim sum bonds as an asset class, given the low yields of onshore RMB debt at this time. Such debates about the delicate dance between the onshore and offshore debt markets may continue into 2016 and beyond. 14 Offshore RMB Bond & CD Issuance RMB Bn Oct-15 Bonds CD Source: BOCHK and BOCHK Asset Management. Data as of October Past performance is no guarantee of future results. Please see important legal disclosures at the end of this document. RMB payments evolution Customer initiated and institutional payments. Messages exchanged on SWIFT. Based on value. 28% 29% 25% 26% 26% 26% 17% 22% 19% 19% 18% 20% 21% 19% 17% 18% 5% 17% 4% 4% 4% 4% 4% 4% 79% 79% 79% 78% 77% 78% 77% 2 4% 4% 4% 4% 4% 77% 75% 75% 74 % 74 % 25% 27% 26% 26% 26% 26% 24% 25% 7 72% 72% 72% 71% 26% 4% 27% 4% 71% 28% 69% 69% 26% 71% 25% 72% 68% 27% 26% 4% 4% 71% 69% 4% 5% 5% 26% 5% 5% 69% Jan-2013 Feb-2013 Mar-2013 Apr-2013 May-2013 Jun-2013 Jul-2013 Aug-2013 Sep-2013 Oct-2013 Nov-2013 Dec-2013 Jan-2014 Feb-2014 Mar-2014 Apr-2014 May-2014 Jun-2014 Jul-2014 Aug-2014 Sep-2014 Oct-2014 Nov-2014 Dec-2014 Jan-2015 Feb-2015 Mar-2015 Apr-2015 May-2015 Jun-2015 Jul-2015 Aug-2015 Sep-2015 Oct-2015 Other countries China Hong Kong Source: Swift. Data as at November Past performance is no guarantee of future results. Please see important legal disclosures at the end of this document. 13 Bloomberg. January FTSE Russell FTSE BOCHK Offshore RMB Bond Quarterly Research Report 4

5 Commentary by BOCHK Asset Management Limited The Outlook for RMB Internationalisation The IMF s decision to include the RMB in the SDR basket starting October 1, is an indisputable milestone for China s currency, which will now join the ranks of the U.S. dollar, pound sterling, euro, and Japanese yen as one of the world s five major barometers of value. Long-term, the IMF s move may drive up demand for RMB demoninated assets both debt and equity while in the short-term, it will likely serve as a vote of confidence in China s potential, which is timely and welcome given the US$3 trillion stock market rout in July and RMB devaulation in August, in addition to China s broader macroeconomic slowdown. 16 Moving into 2016 and beyond, market participants will likely see more RMB circulate around the world and between central banks as RMB demand expands following the IMF s decision. According to conservative analyst estimates, market participants may see US$80 billion in lateral RMB demand from central banks, and another US$120 billion per year from a combination of pension, institutional and retail sources in the years ahead. 17 In the medium to long-term the IMF decision is a step toward internationalisation now the RMB is a global reserve currency, said Ben Yuen Cheuk Bun, Managing Director and Head of Fixed Income, BOCHK Asset Management Limited. At the same time, the currency is delivering on many other fronts and enjoys a growing reputation among central banks. For global payments, it already ranks fifth place in the world; for trade finance, second place; and in FX trading, sixth place. Yet, the U.S. dollar is strengthening. That may continue to impact the RMB s valuation in the short-term. 15 IMF. November FTSE Russell FTSE BOCHK Offshore RMB Bond Quarterly Research Report 5

6 RMB s share as an international payments currency Customer initiated and institutional payments. Messages exchanged on SWIFT. Based on value. January 2014 October 2015 USD EUR GBP JPY CAD AUD CNY CHF HKD THB SEK SGD NOK DKK PLN ZAR RUB MXN NZD TRY #1 #2 #3 #4 #5 #6 #7 #8 #9 #10 #11 #12 #13 #14 #15 #16 #17 #18 #19 # % 33.52% 9.37% 2.50% 1.80% 1.75% 1.39% 1.38% 1.09% 0.98% 0.97% 0.88% 0.80% 0.60% 0.58% 0.40% 0.40% 0.39% 0.35% 0.34% USD EUR GBP JPY CNY CAD CHF AUD HKD THB SGD SEK NOK PLN DKK ZAR MXN NZD TRY CLP #1 #2 #3 #4 #5 #6 #7 #8 #9 #10 #11 #12 #13 #14 #15 #16 #17 #18 #19 # % 29.89% 9.05% 3.00% 1.92% % 1.54% % 0.95% 0.94% 0.71% 0.56% 0.45% 0.44% 0.35% 0.35% % Source: Swift. Data as at November Past performance is no guarantee of future results. Please see important legal disclosures at the end of this document. RMB s growing reputation among central banks Iceland, 3.5bn Canada, 200bn UK, 350bn ECB, 350bn Switzerland,150bn Albania, 2bn Hungary, 10bn Belarus, 20bn Turkey, 10bn Ukraine, 15bn Armenia, 1bn Russia, 7bn Mongolia, 15bn Kazakhstan, 7bn Uzbekistan, 0.7bn Korea, 360bn Suriname, 1bn Brazil, 190bn Qatar, 35bn UAE, 35bn Pakistan, 10bn Sri Lanka, 10bn Singapore, 300bn Thailand, 70bn Hong Kong, 400bn Malaysia, 180bn Indonesia, 100bn Swap line total amount RMB 3.3tn Chile, 50bn Argentina, 70bn South Africa, 30bn Australia, 200bn New Zealand, 25bn Source: PBOC, BOCHK. Data as of November Past performance is no guarantee of future results. Please see important legal disclosures at the end of this document. Growth of the Offshore RMB Bond Market Despite the RMB s significant achievements, the volume of new dim sum bond issuances in 2016 may not match that of recent years. The loss of appetite is due to not only China s financial reform challenges and the slide in the RMB s valuation, but also the proliferation of alternative China investment and FTSE Russell FTSE BOCHK Offshore RMB Bond Quarterly Research Report 6

7 financing options for issuers and market participants, such as the Shanghai- Hong Kong Stock Connect or the onshore Panda bond market, among others. 18 Many analysts predict China s policymakers will remain committed to further opening the country s capital account in 2016 with schemes such as the mutual recognition of funds (MRF) scheme, which grants Hong Kong registered asset managers coveted access to onshore Chinese clients. Meanwhile, China s leaders may also continue efforts to enhance the RMB s clearing and settlement infrastructure at the global level, while they also improve coordination with other central banks, whether through bilateral currency swaps or other measures. 19 Major Milestones of the RMB Internationalisation 2004 Introduction of RMB business in HK, including deposit-taking, remittance currency conversion & bank card business 2009 Implementation of Pilot scheme of cross-border RMB trade settlement 2011 Launched pilot programs of RMB Qualified Foreign Institutional Investors (RQFII) 2015 Capital account liberalisation continued Issuance of RMB bonds in HK ( Dim Sum Bond ) by mainland financial institutions 2010 Revised Settlement Agreement facilitated the rapid development of offshore RMB (CNH) market 2014 Free Trade Zones & Shanghai-Hong Kong Stock Connect launched Source: BOCHK. Data as of October Past performance is no guarantee of future results. Please see important legal disclosures at the end of this document. Against this backdrop, China s ambitious One Belt, One Road development initiative to strengthen trade links between Asia, Europe and Africa may drive demand for new infrastructure projects across Central and West Asia, which foreign investors and corporates could finance with RMB. Those financing needs may, in turn, activate capital markets and result in more bond issuances, according to some analysts. 20 Although funding costs are currently cheaper onshore, that situation is unlikely to be permanent as China recovers from the stumbling blocks of Dim sum issuance could rebound once funding costs return to previous levels offshore. 21 There s little doubt that 2015 was a very tough year, said Yuen. It was a year that the RMB had to experience the inevitable pain that accompanies such a significant evolution. In many ways, the past five years have spoiled the RMB the currency kept rising and rising on the back of China s historic growth and some market participants didn t expect that to end. But now China is settling into a more stable and balanced growth phase. That means demand for RMB denominated assets such as dim sum bonds will be more dynamic and drawn from a more diverse base in 2016 and in the years ahead FTSE Russell FTSE BOCHK Offshore RMB Bond Quarterly Research Report 7

8 Diversified Investment Channels PBOC is liberalising the capital account step-by-step to facilitate cross-border investment flows and ensure sufficient risk controls are in place QDII Scheme QDII Scheme Shanghai - Hong Kong Stock Connect Shenzen - Hong Kong Stock Connect Shanghai-London Stock Connect Going Forward QFII Scheme RQFII Scheme Mutual Recognition of Funds Source: BOCHK. Data as of November Past performance is no guarantee of future results. Please see important legal disclosures at the end of this document. Performance of FTSE-BOCHK Offshore RMB Bond Index Series Redemption Yield The market value duration weighted average redemption yield of the FTSE- BOCHK Offshore RMB Bond Index in December was at 4.99 percent. Among the 3 sub-indexes the FTSE-BOCHK Offshore RMB Investment Grade Index was at 4.30 percent; the FTSE Chinese Sovereign Bond Index was at 3.94 percent; and the FTSE-BOCHK Offshore RMB 1-3 Years Central Government Bond Index was at 3.69 percent. Market Value Duration Weighted Average Redemption Yield % Dec-2010 Dec-2013 FTSE-BOCHK Offshore RMB Bond Index FTSE-BOCHK Offshore RMB Chinese Sovereign Bond Index FTSE-BOCHK Offshore RMB Investment Grade Bond Index FTSE-BOCHK Offshore RMB 1-3 Years Central Government Bond Index Source: FTSE Russell, data as at 31 December Past performance is no guarantee of future results. Returns shown may reflect hypothetical historical performance. Please see important legal disclosures at the end of this document. Compared with three months ago, the yield for the FTSE-BOCHK Offshore RMB Chinese Sovereign Bond Index rose 0.45 percent to 3.91 percent. The yield rose 1.07 percent for the FTSE-BOCHK Offshore RMB Bond Index; climbed 0.77 percent for the FTSE-BOCHK Offshore RMB Investment Grade Bond Index; and gained 0.71 percent for the FTSE-BOCHK Offshore RMB 1-3 Years Central Government Bond Index. FTSE Russell FTSE BOCHK Offshore RMB Bond Quarterly Research Report 8

9 Total Return The FTSE-BOCHK Offshore RMB Bond Index finished up 1.90 percent during the past three month period (October December), with the FTSE- BOCHK Offshore RMB Investment Grade Bond Index up 1.23 percent; the FTSE Chinese Sovereign Bond Index up 0.83 percent; and the FTSE-BOCHK Offshore RMB 1-3 Years Central Government Bond Index up 0.58 percent as shown in Table 1. Table 1. Performance and Volatility Total Return (CNH) Index Return % Volatility %* 3M 6M YTD 12M 3YR Since Inception 1YR 3YR Since Inception FTSE-BOCHK Offshore RMB Bond Index FTSE-BOCHK Offshore RMB Chinese Sovereign Bond Index FTSE-BOCHK Offshore RMB Investment Grade Bond Index FTSE-BOCHK Offshore RMB 1-3 Years Central Government Bond Index *Volatility 1YR, 3YR, Since Inception based on daily data. Source: FTSE Russell - total return data in CNH, as at 31 December Past performance is no guarantee of future results. Returns shown may reflect hypothetical historical performance. Please see the important legal disclosures at the end of this document. The general position is that data charts should be used as a helpful way to present performance and assist readers in understanding the effects of different methodologies for different indexes They should not be used as a way of suggesting that one index is better suited to a client than another. Meanwhile, offshore RMB has depreciated 3.22 percent and also 3.22 percent against the USD and HKD, respectively, since the end of September The total returns in CNH, USD and HKD are summarised as follows: Table 2. Total Returns in CNH, USD and HKD Index Return % Volatility %* 3M 6M YTD 12M 3YR Since Inception 1YR 3YR Since Inception FTSE-BOCHK Offshore RMB Bond Index (CNH) FTSE-BOCHK Offshore RMB Bond Index (USD) FTSE-BOCHK Offshore RMB Bond Index (HKD) *Volatility 1YR, 3YR, Since Inception based on daily data. Source: FTSE Russell total return data in CNH, USD and HKD, as at 31 December Past performance is no guarantee of future results. Returns shown may reflect hypothetical historical performance. Please see the important legal disclosures at the end of this document. The general position is that data charts should be used as a helpful way to present performance and assist readers in understanding the effects of different methodologies for different indexes They should not be used as a way of suggesting that one index is better suited to a client than another. FTSE Russell FTSE BOCHK Offshore RMB Bond Quarterly Research Report 9

10 Breaking down the returns of the FTSE-BOCHK offshore RMB Index for the past three months, the three building blocks - Chinese sovereign bonds, investment grade bonds, and high yield/non-rated bonds have contributed 0.02 percent, percent and percent, respectively. Table 3. FTSE-BOCHK Offshore RMB Bond Index Building Blocks 1M Performance (%) October November December Number of Bonds Weighting 1M Performance (%) Number of Bonds Weighting 1M Performance (%) Number of Bonds Weighting FTSE-BOCHK Offshore RMB Bond Index Chinese Sovereign Bonds Investment Grade Corporate Bonds High Yield/Non-rated Bonds Source: FTSE Russell - total return data in CNH, as at 31 December Past performance is no guarantee of future results. Returns shown may reflect hypothetical historical performance. Please see the important legal disclosures at the end of this document. The general position is that data charts should be used as a helpful way to present performance and assist readers in understanding the effects of different methodologies for different indexes. They should not be used as a way of suggesting that one index is better suited to a client than another. Index Changes in the Last Quarter In the last quarter, the bond market value of the FTSE-BOCHK Offshore RMB Bond Index decreased by 4.70 percent from 303,426 to 289,151 RMBm just before the September and December rebalances. As of 31 December 2015, corporate and enterprise bonds continued to have the largest weighting in the index at percent, a 0.93 percent increase compared to 3 months ago. Yet, the number of constituents in this category decreased from 147 to 141. Unlike corporate and enterprise bonds, the weight of the bonds issued by China s government shrank by 0.72 percent compared to the last quarter, arriving at percent; and the weight of the bonds issued by policy banks grew by 0.62 percent, arriving at percent after the latest review. The percentage of investment grade bonds in the index reduced to percent compared to percent on 30 September The FTSE- BOCHK Offshore RMB Bond Index modified duration was shortened from 2.58 years to 2.47 years, decreasing its sensitivity to the yield curve shift. On the other hand, the convexity of the index dropped by 0.51 when compared to that of the last quarter. FTSE Russell FTSE BOCHK Offshore RMB Bond Quarterly Research Report 10

11 Table 4. New Additions in the Past 3 Reviews Review Bond Nominal Amount (RMBm) October 2015 Agricultural Bank of China Ltd Oct % 600 Banks October 2015 China Construction Bank Corp Oct % 1,000 Banks November 2015 Tianjin Eco-City Investment & Development Co Ltd Oct % Source: FTSE Russell, data as at 31 December Past performance is no guarantee of future results. Table 5. New Deletions in the Past 3 Reviews 1,000 Real Estate ICB Supersector Review Bond ICB Supersector September 2015 Air Liquide Finance SA Sep % Chemicals September 2015 Anstock Ltd Sep % Technology September 2015 September 2015 September 2015 September 2015 Industrial & Commercial Bank of China Ltd/Singapore Sep % International Bank for Reconstruction & Development Sep % SK Global Chemical Investment Hong Kong Ltd Sep BSH Bosch und Siemens Hausgeraete GmbH Sep % Banks UN Organization Chemicals Personal & Household Goods November 2015 Hong Kong Aviation Ltd Nov % Travel & Leisure November 2015 Province of British Columbia Nov % Canton, Region, Province and State November 2015 Industrial & Commercial Bank of China Ltd Nov % Banks November 2015 Value Success International Ltd Nov % Insurance November 2015 China Government Bond Nov % Nation and Treasury November 2015 Shanghai Baosteel Group Corp Dec % Basic Resources Source: FTSE Russell, data as at 31 December Past performance is no guarantee of future results. FTSE Russell FTSE BOCHK Offshore RMB Bond Quarterly Research Report 11

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