The RMB Internationalisation Paris, a hub for Europe

Transcription

1 The RMB Internationalisation Paris, a hub for Europe November 2012

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3 Table of Contents Foreword... 7 Glossary... 9 Executive Summary Part I: The Emergence of a New Settlement Currency I. The private sector and the RMB internationalisation The Trade Settlement Scheme...18 A. An irreversible trend?...18 a. Such initiative is part of a more global China FX deregulation trend b. An exponential acceleration of cross-border RMB trade settlements c. Cross-border trade settlements still effected mainly in Hong Kong d. The acceleration of RMB cross-border trade settlements offers new opportunities (and new challenges) for the Eurozone trade relationship with China e. The use of RMB by overseas corporate and financial institutions B. A strict control of the offshore RMB liquidity by PBoC...24 a. The RMB offshore liquidity is mainly in Hong Kong b. The PBoC strict control of the Hong Kong offshore RMB liquidity c. The cross-border RMB payment system: operational challenges still exist From an offshore pool of liquidity to an emerging international capital market...26 A. RMB bonds issued from Hong Kong (and so far marginally, from other financial centres)...26 a. A flexible legal environment b. A controlled legal environment c. Trends in the offshore RMB bond market issuance B. The offshore RMB CD market...31 C. The loan market Onshore RMB (equities and bonds) accessible to offshore investors...33 A. Qualified Foreign Institutional Investors (QFII)...33 B. RMB Qualified Foreign Institutional Investors (RQFII)...33 II. The Public Sector and the RMB Internationalisation...34

4 Part II: Paris and the RMB Internationalisation I. The Paris Contribution to the RMB trade settlement scheme The SWIFT RMB data...39 A. RMB as a global payment currency...39 B. RMB transactions French RMB trade settlement and RMB deposits...40 A. French RMB trade settlements...40 B. RMB deposits with Paris banks...40 II. The Paris RMB financial services offer Account services RMB cross-border funds transfer Foreign exchange and time zone...42 III. French Issuers and the RMB debt capital markets French corporates are among the most active European issuers...44 A. European issuers...44 B. An important number of potential new French issuers...44 C. Listing and depository system...45 D. The use of proceeds: illustration The Paris offshore RMB loan market...47 IV. Paris and the new emerging RMB financial centres Criteria for a RMB financial centre The emerging RMB financial centres...48 A. Taipei...48 B. Singapore...49

5 Part III: The Increasing Role of the Debt Capital Markets I. The bond markets international growing role The global bond capital market trends The growing importance of the euro capital markets...55 A. The euro as one of the major international currencies...55 B. Paris, the leading euro-denominated bond market The Chinese corporate bond financing and the debt capital market...59 A. Onshore...60 B. Offshore...61 II. The Sino-French Financial Cooperation Paris EUROPLACE organisation and missions The Sino-French Financial Cooperation...63 A Municipality of Shanghai/Paris EUROPLACE MOU...63 B NAFMII/ Paris EUROPLACE MOU...64 Conclusion Exhibits... 69

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7 Foreword The internationalisation of the RMB is a key event for the international monetary system and a key opportunity for international corporates and market players to support the development of their business with China. Paris EUROPLACE, the leading Eurozone financial center, which gathers all the market users corporates, including SMEs, investors, banks and financial institutions - is more than ready to contribute to this process and develop RMB instruments and services on European level. More particularly, the French corporates are closely following the development of the RMB denominated financial and banking services. The growing commitment of French companies, large and SMEs, in China confirms the importance for French companies to gain access to RMB banking and financial products. This need is already highlighted by several key facts and trends: - Nearly 10% of the Sino-French trade is settled in RMB; - The growing use by French corporate of the RMB banking services: the major international banks in Paris are offering to their clients from Hong Kong and also from Paris, all the RMB instruments and services already available. Moreover, the volume of RMB deposits in Paris already amounts to RMB 10bn. - The French companies are among the major European users of RMB-denominated bonds in Hong-Kong with RMB 7 bn issued in 2011/2012. This market is already considered by the major French corporates active in China as competitive, not only for its attractive terms but also for the diversification of the investors demand which it offers. In this context Paris EUROPLACE has set up a working group, gathering the French and Chinese major banks based in Paris, as well as the Market Authorities, to identify the Paris financial marketplace priorities. First concrete objectives have been identified: - to develop the best RMB-denominated offer and services for corporates, including SMEs, to accompany the development of their trade and/or investments activities in China, - to organize an efficient offshore RMB liquidity pool in Paris to retain and recycle RMB flows, including the Sino-African business flows which are traded through Paris, - to offer the best liquidity to international banks active on the RMB market at any time in a day, in complementary with Hong Kong trading hours. This document illustrates the ambition of Paris marketplace to participate, in a concrete and active way, in the internationalisation of the RMB and to consolidate its position as a major RMB hub for Europe. Gérard MESTRALLET, Chairman, Paris EUROPLACE, Chairman, GDF SUEZ The RMB Internationalisation Paris, a hub for Europe n 7

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9 Glossary PRC: People s Republic of China Chinese regulators PBoC: People s Bank of China MOFCOM: Ministry of Commerce of the People s Republic of China MOF: Ministry of Finance of the People's Republic of China SAFE: State Administration of Foreign Exchange NDRC: National Development and Reform Commission NAFMII: National Association of Financial Market Institutional Investors RMB: Ren Min Bi, the name means the People s Currency. It is the official currency of the PRC CNY: Chinese National Yuan, the Yuan is the primary account of the RMB. CNY is the only code of the Chinese currency recognized by the ISO (International Standards Organization) CNH: Chinese Yuan deliverable in Hong Kong, this non-official code designates the offshore RMB to be distinguished from onshore RMB which is legal tender in the PRC Hong Kong regulator and associations HKMA: Hong Kong Monetary Authority SFC: Securities and Futures Commission (regulator of the securities firms) TMA: Hong Kong Treasury Market Association LMA: Loan Market Association APLMA: Asian Pacific Loan Market Association Interest rates EURIBOR: Euro Interbank Offered Rate LIBOR: London Interbank Offered Rate SHIBOR: Shanghai Interbank Offered Rate HIBOR: Hong Kong Interbank Offered Rate (not yet in existence) Payments and Settlement System SWIFT: Society for Worldwide Interbank Financial Telecommunication CNAPS: China Advanced Payment System CIPS: China International Payment System CMU: Central Moneymarkets Unit (clearing and settlement system of debt securities in Hong Kong) The RMB Internationalisation Paris, a hub for Europe n 9

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11 Executive Summary: The RMB Internationalisation Paris, a hub for Europe The Paris EUROPLACE Working Group s 1 assessments are based on two markets surveys initiated by Paris EUROPLACE focusing on: the range of RMB financial services offered by the members of the Paris EUROPLACE Working Group (exhibit 1: Banque de France s questionnaire); the needs and practices of French corporates regarding the use of offshore RMB (exhibit 2: 2012 Paris EUROPLACE Survey). Moreover, Bank of China (BoC) conducted a general market survey among 200 clients in February 2012; their conclusions are included in the Paris EUROPLACE Working Group analysis. Part I: The Emergence of a New Settlement Currency An international currency market requires a sufficient amount of liquidity to perform smoothly and efficiently. Since the RMB is currently not fully convertible, the two main sources of the RMB offshore liquidity are: for the private sector: the trade settlement scheme initiated by China s State Council; for the public sector: the bilateral swap agreements between the PBoC and international Central Banks. I. The private sector and RMB Internationalisation 1.1 The Trade Settlement Scheme The trade settlement scheme introduced in stages since 2009 by China s State Council, allows the People s Republic of China (PRC) international trade to be settled in RMB. The percentage settled in RMB grew from 2.5% in 2010 to 12% as of October 2012 and this evergrowing trend seems irreversible. Hong Kong was the main beneficiary of the trade settlement scheme : RMB deposits increased almost exponentially to reach close to CNY550bn in September This trend is essentially driven by the growing use of the RMB as a trade settlement currency and partly by the expectations of the RMB s appreciation (30% since 2005). RMB used for trade settlement can be obtained through a Clearing Bank (BOC-HK) within a conversion quota of CNY8bn by trimester for all the conversion on onshore RMB (CNY) converted into offshore RMB (CNH) and vice-versa. In addition, to prevent any offshore RMB liquidity squeeze, a bilateral swap agreement between the PBoC and the HKMA has been in place since In order to be efficient, the trade settlement scheme also requires a technology transfer compatible between the existing onshore settlement platform and the offshore crossborder payments system. Today, such compatibility is still imperfect and the PBoC is developing a new system to settle cross-border RMB payments aimed at accelerating the volume of trades settled in RMB. 1 The Paris EUROPLACE Working Group is composed of the Banque de France and the French Treasury, Ministry for the Economy and Finance as observers, Bank of China Paris, BNP Paribas, BPCE Natixis, Crédit Agricole, HSBC, ICBC Paris, Linklaters, Société Générale,.(cf: Exhibit 6) The RMB Internationalisation Paris, a hub for Europe n 11

12 1.2 Offshore RMB financial market From the development of a RMB offshore liquidity in Hong Kong (the CNH market), there has emerged a RMB offshore capital market principally comprised of securities such as bonds and CDs, equity (also there has been only one IPO to date) and to a lesser extent, bank loans. Today, the CNH offshore bond market is mainly used by Chinese (40%) and Asian (30%) issuers. The remaining 30% are used by European issuers, of which more than 90% are French and German. Investor demand is mainly Asian, accounting for more than 70%, and between 20% to 30% European. Almost 80% of bond tenors are up to 3 years and the number of institutional investors seeking longer maturities (up to 10 years) is limited but increasing (mainly insurance companies which start to write insurance contracts in RMB). The CD market is mainly used by HK banks (including local branches of French and other European banks) as a complement or substitute to RMB deposits. The offshore RMB loan market is limited to bilateral bank loans, the lack of official offshore RMB benchmark reference rates being the main barrier to the emergence of a RMB syndicated loan market. 1.3 Onshore RMB assets accessible to offshore investors The Chinese regulators are encouraging and facilitating the repatriation of offshore RMB either to finance onshore investments or to invest in onshore RMB assets (equity or bonds). Two schemes allow non-resident financial institutions that have been approved and licensed by Chinese authorities to commercialize funds that are then invested in onshore assets within an individual and fixed quota: Qualified Foreign Institutional Investors (QFII), whose total quota was raised from CNY30bn to CNY80bn in April 2012; RMB Qualified Foreign Institutional Investors (RQFII) launched early 2012 and whose quota has been raised to CNY 70bn in April 2012 and should soon be raised to CNY 270bn. II. The Public Sector and the RMB Internationalisation In addition to the HKMA, the PBoC has contracted several currency bilateral swap agreements with international Central Banks, allowing, within the limits of the swap line, convertibility of the RMB. With such facilities, foreign Central Banks can add RMB assets to their foreign currency reserves and facilitate cross-border RMB trade settlements and RMB investments. Part II: Paris and the RMB Internationalisation The Paris financial centre supports RMB internationalisation as an important opportunity. Hence, the major concrete priorities for the Paris financial centre are: to organize the best RMB-denominated offer and services for corporates, including SMEs, 2 «France has plenty of successful world class multinationals in a wide variety of industries» (Financial Times, November 17, 2012). 3 MOFCOM Circular date 12 October 2011 and PBoC Measure date 13 October n The RMB Internationalisation Paris, a hub for Europe

13 ..to organize an efficient offshore RMB liquidity pool in Paris to retain and recycle RMB flows including the Sino-African business flows which are traded through Paris,..and to offer the best liquidity to international banks active on the RMB market at any time in the day, in complementary with Hong Kong trading hours. Statistics are limited for assessing the size of the offshore RMB market in Paris. This is why, a qualitative survey was conducted within the members of the Paris EUROPLACE Working Group. It is worth noting that many banks are currently expanding their RMB operations in France and that, at the very least, the major French and Chinese banks in Paris, also present and active in Hong Kong, are already offering, both in Paris and Hong Kong, most of the RMB products and services currently requested by companies (taking into account the time zone difference). In addition, the current level of Paris RMB activities can be estimated from the two surveys undertaken by Paris EUROPLACE and Banque de France. Indeed, the ratio of French trade with China settled in RMB, is progressing, especially with the large corporates (most of whom are very active in China), but those possibilities remain not very well-known among the SMEs.. Of equal significance is how and why the French corporates 2 are using the RMB offshore market and, more specifically, the offshore bond market (the second market survey). This market is already considered by the major French corporates active in China as competitive, not only for its attractive terms but also for the diversification of the investor base it offers. With the relaxation of the repatriation of bonds (and loans) proceeds in China 3, French corporates have been increasingly relying on exclusively the RMB offshore market to finance their development in China. Moreover, most offshore RMB bonds issued by French corporates are issued from Paris: they are deposited with the French central depositary of securities (Euroclear France), they are documented off the shelf of an EMTN programme registered with the AMF (the French Financial Markets Authority). They are governed by French Law and are listed on Euronext Paris. Only the pricing, syndication and placement are done from Hong Kong considering that most of the investors are located in Asia (although the share of European investors is increasing). Part III: The Increasing Worldwide Role of the Debt Capital Markets I. The increasing role of the debt capital markets 1.1. According to the latest BIS statistics, Paris is the leading securities debt markets in Europe in terms of total amount outstanding, ranking number 3worldwide, after the USA and Japan. The securities debt markets are playing a major role within the economy and corporate funding and this ever-growing trend will further be accelerated in the coming years Chinese corporates financing is following the same pattern driven by the debt securities markets and less by bank lending. Furthermore, Chinese corporates are not only the main issuers on the offshore RMB bond market but are important players also on the international (USD, JPY and EUR) markets. The RMB Internationalisation Paris, a hub for Europe n 13

14 II. The Paris EUROPLACE approach The increasing role of the debt capital markets in the Eurozone as well as in the People s Republic of China (PRC) are the main factors guiding the Paris EUROPLACE approach: 2.1. Paris EUROPLACE gathers today all the market stakeholders corporates, investors, banks, insurance companies, law firms, etc operating from Paris whether French orinternational, along with the French market authorities and regulators. Therefore, Paris EUROPLACE s mission is to leverage the collective strengths to achieve the greatest efficiency and openness of Paris as the main Eurozone financial centre. In that respect, one of the Paris EUROPLACE s other main mission is to develop business relations with other international financial centres Faced with the increasing role of the RMB debt capital markets (onshore and offshore), Paris EUROPLACE signed in December 2010 a MOU with the Shanghai Financial Services Office of the Shanghai Government and in April 2012, a MOU with the National Association of Financial Market Institutional Investors (NAFMII). Moreover, Paris, once the capital control are at least partially lifted by Chinese authorities, welcome Mainland Chinese investors in Paris where they could either subscribe to equity or bond of the many French corporates that rank among the leading companies of their sector worldwide (with 32 of the Fortune 500 global companies, France ranks number 4th). Conclusion Paris EUROPLACE s immediate objective is to accelerate and widen the understanding of the opportunities offered by the RMB internationalisation to those French corporates trading and investing in China, and also the many SMEs who are less informed. In that respect, the current level of offshore deposit and liquidity in Paris is sufficient enough to foster growth. And, it is important to keep in mind that there is no frontier between the various offshore markets outside of China and that in fact; the liquidity is already freely flowing between them, only constrained by time zone delays. In practice, Hong Kong is currently providing enough liquidity to Paris to cope with the evolution of the RMB trade settlements today and for the near future. However, above a certain level of RMB business, a specific action such as a swap line should be considered by French authorities. Concretely, Paris EUROPLACE Working Group is committed within the developments of the Chinese currency, with the objective of accompanying European corporates to locate their RMB-denominated financial activities in Paris by: developing further access to RMB products and services in the European time zone to facilitate the European corporates, notably SMEs, to use RMB for trade settlement purposes, building on the Paris strengths, as the European leader for Euro-denominated corporate bond market, the major gateway for RMB bond issuance in Europe and, custody services can also be expected to develop as a significant part of the Paris offer. Moreover, dealing in Europe, through Paris, will also allow French companies to maintain a single legal framework reducing the cost of doing business with China. 14 n The RMB Internationalisation Paris, a hub for Europe

15 Paris EUROPLACE s third objective is to widen the scope of the cooperation with China by sharing expertise and information. Paris prime position as an international financial centre and its growing level of RMBdenominated business put it in a very good position to be a major player in developing the international RMB market and at the very least, the main RMB offshore center of the Eurozone There is a strong commitment amongst Paris global institutions to develop RMB business, contributing to the emergence of the RMB as one of the foremost global currencies alongside the USD and the Euro. The RMB Internationalisation Paris, a hub for Europe n 15

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17 Part I The Emergence of a New Settlement Currency

18 I. The Emergence of a New Settlement Currency I. The private sector and the RMB internationalisation The gradual internationalisation of the RMB market has been driven by the Chinese State Council, the PBoC, the MOFCOM and the SAFE. The three phases towards that internationalisation have been (1) the establishment of the Trade Settlement Scheme in 2009, followed by (2) the emergence of an offshore RMB compartment of the international financial market in 2010 and more recently (3), the development of RMB offshore portfolio flows The Trade Settlement Scheme A. An irreversible trend? In , the PBoC launched several initiatives to encourage the private sector use of the RMB. In July 2009, a pilot programme authorizing the invoicing of commercial transactions in RMB of five authorized Chinese cities with Hong Kong, Macau and the ASEAN countries was launched. In June 2010, the programme was expanded to twenty Chinese provinces for all transactions with any part of the world. Since June 2012, all Chinese entreprises which are eligible to international trade are allowed to use RMB for cross-border trade settlement. a. Such initiative is part of a more global China FX deregulation trend The China FX Deregulation Trend PBoC announced that China will implement a regulated, managed floating exchange rate system based on market supply and demand and in reference to a package of currencies since 21 July USD/CNY Fixing: on 21 July vs on 22 July On 8 April 2009, China s State Council announced a pilot program to allow exporters and importers in five cities to settle crossborder trade deals in CNY. On 6 July 2009, Bank of China transacted the first cross-border CNY trade settlement deal. RMB Cross-Border Trade Settlement On 19 July 2010, PBoC and HKMA signed a Supplementary Memorandum of Cooperation while the PBoC and Bank of China (Hong Kong) also signed a revised Settlement Agreement on the Clearing of Renminbi Businesses to expand CNY business scope from trade related to general purposes The Birth of New Currency CNH On 13 January 2011, the PBoC unveiled rules allowing domestic firms to use RMB for direct investment overseas. RMB ODI On 11 January 2012, the National Development and Reform Commission announced on its website that Guangdong Nuclear Power (China's secondlargest reactor builder) won its approval in December 2011 for RMB 3bn of loans from Bank of China in Hong Kong. CNH Loans On 15 April 2012, the PBoC announced to widen USDCNY daily trading band to allow CNY to fluctuate by up to 1.0% in value against USD each day with effect from 16 April 2012, up from 0.5% previously. USD/RMB Trading Band Widening SAFE announced on 13 August 2007 that domestic institutions may retain their foreign exchange income under the current account according to their operational needs and Banks shall stop using the quota administration function of the foreign exchange account management information system when opening foreign exchange accounts and handling foreign exchange receipts and payments for domestic institutions. The PBoC announced on 19 June 2010 that they would "proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility." On 17 August 2010, PBoC publised its Notice on Pilot Scheme for Renminbi Clearing Bank and Other Eligible Institutions outside the Mainland to invest in the Mainland s Interbank Bond Market. SAFE announced its new NOP2 limit with effect from 9 November 2010 in addition to the existing NOP1. NOP1= FX Spot + FX Outright Forwards >=0 NOP2=[NOP1 Outright Forwards] as of 8 November 2010 On 12 October 2011, MOFCOM published its Circular on Relevant Issues on Cross-border RMB Direct Investment Foreign investors may use their legitimate offshore RMB funds to directly invest into China. On 13 October 2011, PBoC issued the Administrative Measures on RMB Settlement for Foreign Direct Investment replacing the prior case-by-case approval requirement RMB FDI On 16 December 2011, China launched its long-awaited RMB QFII (RQFII) pilot programme with an initial quota of RMB 20bn. CSRC said on 3 April 2012 this quota has been increased to RMB 70bn. QFII quota ceiling was increased by USD 50bn to USD 80bn as well. RMB QFII SAFE decided to replace previously existing NOP1 and NOP2 limits with new +/- position limit management with effect from 16 April Allow negative Lower Limit in NOP1; Cancel NOP2 Source: BNP Paribas 18 n The RMB Internationalization Paris, a hub for Europe

19 b. An exponential acceleration of cross-border RMB trade settlements The use of the RMB as a settlement currency for foreign trade transactions has rapidly increased. In September 2012, cross-border payments in RMB amounted to RMB CNY279.65bn and accounted for about 10% of total transactions compared to 2.5% in A large share of the RMB-denominated trade is carried out with Hong Kong. This scheme was initially beneficial mainly to Mainland Chinese importing companies which could pay for their imports from foreign suppliers in RMB, while foreign buyers were reluctant to use RMB to pay for their imports from Mainland Chinese suppliers, preferring keeping their RMB offshore in the expectation of gains from RMB appreciation against other currencies (mainly USD). However, with the market turmoil experienced at the end of 2011, those expectations have moderated, and the use of RMB in cross-border trade settlement has become more balanced; initially, RMB payments for Chinese imports represented 80% of the total crossborder settlements compared to only 20% for Chinese export payments; today, the split is closer to 60:40. While RMB trade settlements are increasing rapidly, more than 90% of China foreign trade is still settled in foreign currencies, mainly USD Cross-border Trade Settlements in RMB (in CNY bn) 0 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Source: PBoC, Société Générale Mar-11 Jun-11 RMB Cross-border Trade Settlement by Goods and Services, 2011 (in CNY bn) Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Goods Services Source: PBoC, Société Générale The RMB Internationalization Paris, a hub for Europe n 19

20 c. Cross-border trade settlements still effected mainly in Hong Kong Commercial transactions denominated in RMB (% of the total at the end of January 2012) Others 21.1% Macau 2.4% Japan 2.5% Taiwan 2.6% Hong Kong 63.7% Singapore 7.7% Source: BBVA Research d. The acceleration of RMB cross-border trade settlements offers new opportunities (and new challenges) for the Eurozone trade relationship with China China has become the world s largest exporter and second largest importer. Since 2009, trade ties between China and the world s main economies have become closer, driving up the volume of imports and exports over recent years. The chart below shows that in 2011, China s imports and exports totalled USD3.6tn. Of those, trade with EU, US, ASEAN, Hong Kong and Africa increased, respectively, by 18%, 16%, 24%, 23% and 26% from the previous year, maintaining a rapid growth. Trade Volumes between China and Major Economies in (in USD) EU USA ASEAN Japan Hong Kong Korea Africa Australia Russia India Canada 20 n The RMB Internationalization Paris, a hub for Europe

21 Total Year EU USA ASEAN Japan Hong Kong Korea Africa Australia Russia India Canada import and export Source: MOFCOM, PBoC The Eurozone trade relationship with China is also growing. It accounts for 14% of total Chinese exports and 10% of total Chinese imports. Conversely, China is the third destination for French exports after the European Union and the United States, accounting for 3% of total French exports. China is the second foreign supplier to France after the European Union, representing 8% of total French imports. Structure of China s Trade (2011, in % of total) EXPORTS IMPORTS Asia 47.4 Asia 57.6 Europe 21.8 Europe 16.8 of which Euro Zone 14.0 of which Euro Zone 10.2 of which Germany 4.0 of which Germany 5.3 Netherlands 3.1 France 1.3 Italy 1.8 Italy 1.0 France 1.6 Belgium 0.6 Spain 1.0 Netherlands 0.5 Belgium 1.0 Spain 0.4 Finland 0.3 Austria 0.3 Greece 0.2 Finland 0.3 Portugal 0.1 Ireland 0.2 Slovakia 0.1 Slovakia 0.2 Malta 0.1 Portugal 0.1 of which United Kingdom 2.3 of which United Kingdom 0.8 North America 18.4 North America 8.3 Latin America 6.4 Latin America 6.9 Africa 3.9 Africa 5.3 Oceania 2.2 Oceania 5.1 TOTAL TOTAL Source: CEIC, Société Générale The RMB Internationalization Paris, a hub for Europe n 21

22 e. The use of RMB by overseas corporates and financial institutions According to a Bank of China's survey conducted in February 2012 among 200 clients, either Chinese or international large companies (including 12 French large companies), 67% of overseas/non-chinese corporates and 30% of overseas/non-chinese financial institutions have used or plan to use RMB and another 30% of overseas/non-chinese financial institutions showed a keen interest in RMB business. Among the corporates, 43% expressed particular attention to diversified and optimized asset/liability allocation, 56% to new facilitating financing arrangement options, 68% to tapping opportunities in RMB financial markets, 87% to exchange rate risk management tools and 97% to facilitation of trade between China and relevant regions. Use of RMB by Overseas Enterprises (Feb. 2012) Have used 18% Plan to increase use 24% Plan to use within 6 months 25% No needs now 33% 0% 5% 10% 15% 20% 25% 30% 35% Source: 2012 Bank of China Survey Use of RMB by Overseas Financial Institutions (Feb. 2012) Have already opened RMB accounts 20% Plan to open accounts within 6 months 10% Interested in RMB 30% No needs now 40% 0% 10% 20% 30% 40% 50% Source: 2012 Bank of China Survey 22 n The RMB Internationalization Paris, a hub for Europe

23 And, according to the TMI (Treasury Management International) survey, led among Asian, American and European companies, RMB demand for cross-border settlement is growing: 71% of respondents already settle or forecast to settle in RMB. Chinese customers and suppliers intend to continue exercising their power to demand settlement in RMB. Key Business Drivers for RMB Settlement 60,20% Requirement by customer or supplier 44,90% ability to negotiate better pricing 33,70% abilitty to offset RMB assets and liabilities 7,10% other Source : Source: treasury 2012 Management TMI Survey Opportunities clearly exist to increase awareness of companies on RMB-related settlement and trading issues. Over 25% of respondent companies of the same survey admitted they were not even aware of the possibility to settle in RMB and nearly 20% indicated that they have no support from their banks to settle in RMB. Barriers to RMB Trade Settlement Do not have trade flows with China Not aware of the opportunity to settle flows in RMB No demand from customers or suppliers 23,40% 27,30% 27,30% Would create surplus cash balance or deficit in RMB 6,50% Too much administration required No support from banks 15,60% 19,50% Other 9,10% Source: 2012 TMI Survey The RMB Internationalization Paris, a hub for Europe n 23

24 Continued growth in the use of RMB for trade settlement can also be attributed to factors such as Chinese and international companies benefiting from favorable borrowing costs, reduction in foreign exchange exposure and potentially, more competitive suppliers access Therefore, some Chinese buyers and suppliers will prefer to transact in their local currency, which can help foreign companies broaden their network of buyers and suppliers. Such a competitive approach is clearly important to the Eurozone trade relationships with China. B. The offshore RMB liquidity a. The RMB offshore liquidity is mainly today in Hong Kong. 700 RMB Deposits in Hong Kong (in CNY bn) /10 05/10 09/10 01/11 05/11 09/11 01/12 05/12 09/12 Source: CEIC, Société Générale Since HK banks were allowed to accept RMB deposits in 2004, the size of RMB deposits in HK has grown rapidly over the years, especially in 2010 and More recently, RMB deposits in Hong Kong decreased by 1.2% to CNY 545.7bn in September 2012 from the previous months. Total remittance of RMB for cross-border trade settlements amounted to CNY239.3bn in September 2012, compared with CNY254.2bn in the previous month. The deposit decrease is partly due to: more channels of RMB going onshore; reduced expectation of RMB appreciation. b. The PBoC strict control of the Hong Kong offshore RMB liquidity The three pillars of the PBoC liquidity monitoring: n An offshore RMB clearing bank: in 2003, the PBoC and the HKMA agreed that Bank of China, Hong Kong (BOC-HK) would function as the sole offshore RMB clearing bank (until 2016) in relation to deposits, currency exchange and remittances. BOC- HK has become the key provider of intraday liquidity to the Participating Authorized Institutions (as of August 2012, 128 with a presence in Hong Kong and 40 overseas). Each bank on this list has opened a settlement account (nostro account) with BOC-HK. 24 n The RMB Internationalization Paris, a hub for Europe

25 n The conversion quota between CNY and CNH: it is critical that the clearing bank has appropriate access to liquidity in CNY. Such CNY accounts are strictly regulated through a conversion quota (conversion of CNY into CNH and vice versa) made available by the PBoC. Regulatory limitations became manifest when BOC-HK exhausted its annual conversion quota of CNY 8bn in October 2010 due to a strong demand by banks for CNH (due in a large part to a profitable USD/CNH/CNY arbitrage). As a result. stricter conversion quota guidelines were implemented in 2011: CNY 4bn quarterly quota for the first three quarters 2011 Banks can only access the BOC-HK if they are net-short or long in CNY and have trade transactions settled within three months. Since then, the bulk of CNY transferred to Hong Kong through the conversion quota, is linked to trade settlements. n The bilateral currency swap agreement between the PBoC and the HKMA: in early 2003, the PBoC and the HKMA signed a RMB 200bn bilateral swap line in order to provide liquidity to the Participating Authorised Institutions in case of a liquidity crisis. Such a crisis occurred in October 2010 when the HKMA was forced to activate the currency swap line. In November 2011, the PBoC doubled the size of the bilateral swap line to RMB 400bn in order to give additional comfort to the market. c. The cross-border RMB payment system: operational challenges still exist. The internationalisation of the RMB, triggered by the cross-border trade settlement, requires a payment circuit securing a smooth process of cross-border transactions. The Chinese onshore payment system CNAPS - was originally established to provide an inland RMB clearing service and as such, has limitations when it comes to processing cross-border RMB payments. For example, SWIFT and CNAPS message formats are not compatible and local language requirements have meant additional resources being allocated for manual processing. This is why, the PBoC is developing a new system to settle cross-border RMB payments aimed at facilitating the use of the Chinese currency in international trade and investment. The China International Payment System CIPS - will be available to banks around the world and become the key infrastructure accommodating international RMB transactions. The HKMA has also extended the operating hours of the RMB Real Time Gross Settlement system in Hong Kong to 15 hours, from 8.30am to 11.30pm (Hong Kong time) since June This provides financial institutions and other financial centres in the European time zone an extended window to settle offshore RMB payments through the Hong Kong infrastructure. The RMB PBoC Monitoring The PBoC monitoring of Hong Kong offshore RMB (CNH) liquidity is aimed at establishing, as long as the RMB is not fully convertible, a separation between the CNY and the CNH by regulating the transfer from CNH to CNY. Such scheme should be soon reproduced with other Asian RMB financial centres: Taipei and Singapore. The RMB Internationalization Paris, a hub for Europe n 25

26 1.2. From an offshore pool of liquidity to an emerging international capital market A. RMB bonds issued from Hong Kong (and so far marginally, from other financial centres) a. A flexible legal environment Offshore RMB debt financings do not require any PRC or Hong Kong regulatory approval. The absence of authorization was confirmed by a letter of elucidation of the HKMA released in February The word elucidation was carefully chosen to convey the message that the letter was not introducing a new rule but was simply clarifying the pre-existing state of affairs. Indeed, the letter of elucidation had the desired effect of making market participants more comfortable and most probably encouraged Hopewell Highways Infrastructure to launch the first ever offshore RMB bond issue by a corporate in July This first was immediately followed by a raft of other offshore RMB bond issues. b. A controlled legal environment Evolution of the Offshore RMB Bond Market Regulation by Chinese Authorities HKMA permits financial institutions and Corporation to issue CNY bonds in HK SAFE issued the Notice on the Issues relating to the Regulation of the Practice of Cross-border RMB Capital Account Related Business - Onshore entities borrowing RMB from offshore should use the same regulations as other foreign debis. MofCOM promulgated the Circular on Relevant Issues on Cross-border RMB Direct Investment - Foreign investors may use their legitimate offshore RMB funds to directly invest into China. CNY businesses formally started in HK PBoC announced that mainland Financial Institutions can issue CNY-denominate d bonds in HK PBoC and HKMA signed a Supplementary Memorandum of Cooperation to expand CNY business scope from trade rellated to general purposes The Birth of New Currency CNH PBoC promulgated the Circular on Relevant issues regarding cross-border RMB business-all application are reviewed by the authorities on a case-by-case basis. PBoC issued the Administrative Measures on RMB Settlement for Foreign Direct Investment - displace the prior case-by-case approval requirement. China authorities continue to support HK to become the offshore CNY center. Jan 18 Jun 8 Feb 11 Jul 19 Apr 7 Jun 8 Oct 12 Oct Jul 12 Aug 19 August Nov 24 Jan First CNY bonds issued in 2007 by China Development Bank largeted to HK retail investors. From 2007 until July 2012, only Chinese and Hong Kong banks issued CNY denominated bond in HK McDonald s issued a CNH200m 3yr bond in HK. - First multinational company to issue a CNY denominated bond in HK - issued offits EMTN programme - The proceeds was remitted into PRC in form of shareholder loan to fund its China operation. Vice Premier Li Keqiang stressed the key role Hong Kong s offshore yuan market would play in th internationalization of the Chinese currency. Li also announced reforms that will allow corporate issuers to sell bonds offshore of a Dim Sum fundraising for overseas investment. Baosteel (A3/A) issued a jumbo CNH3.6bn 3-tranche transaction - This is the first ever CNH transaction issued by a mainland corporate. NDRC approved 10 onshore banks to issue total of CNH25bn bonds in HK. Source: BNP Paribas Offshore RMB financings require no Hong Kong or Chinese consent, so long as the proceeds of such financings are retained outside Mainland China. However, many issuers or borrowers in the offshore market intend to use the proceeds of their offshore financings for investment in their Mainland China businesses or operations. This means that RMB raised in the offshore pool need to become onshore funds, thereby making them subject to China s capital and exchange controls. Obtaining the required consent from not less than three governmental authorities (PBoC, MOFCOM, SAFE) used to be the most time consuming part of any RMB offshore financing, but since October 2011, the PBoC and the MOF issued two circulars which made the process of RMB repatriation quicker and easier. 26 n The RMB Internationalization Paris, a hub for Europe

27 c. The offshore RMB bond market issuance The offshore RMB pool of liquidity is deposited primarily in Hong Kong. This explains why, today, almost 99% of the bonds are distributed from Hong Kong, but other financial centres are aiming at becoming a RMB bond distribution player. n An erratic monthly trend for RMB issues 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Offshore RMB Bond New Issues Volume: Monthly Trend (in CNY bn) Jul 2010 Aug 2010 Sep 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011 Mar 2011 Apr 2011 May 2011 Jun 2011 Jul 2011 Aug 2011 Sep 2011 Oct 2011 Nov 2011 Dec 2011 Jan 2012 Feb 2012 Mar 2012 Apr 2012 May 2012 Jun 2012 Jul 2012 Aug 2012 Sep 2012 Oct 2012 Source: Bloomberg, HKMA, 31 October 2012 Following the peaks of CNH bond issuances in January, May and August 2011, the market adjusted down marginally, which can be explained by poor market sentiment overall, as well as digestion of previous issues. Offshore RMB bond issuance reached a new peak in June/ July 2012, as many issuers accessed the market window to obtain RMB financing. The drop in supply of new CNH bonds in August to October 2012 is mainly due to the uncertainty of currency exchange rate developments. Market participants also appeared to be waiting on the side-lines until the Chinese leadership transition is completed. The RMB Internationalization Paris, a hub for Europe n 27

28 n.offshore RMB new issues dominated by Chinese and Hong Kong issuers Asian Issuers Number of Offshore RMB Issues Corporate Financial Institutions Total Total Worldwide (%) China Hong Kong Total Taiwan Singapore Others Total Total Asian Issuers (1+2) Rest of the World (ROW) Corporate Financial Institutions Total Total (%) Europe USA ROW Total ROW Total Worldwide Year Chinese (including Hong Kong) Issuers ( ) Number of Issuances Total Volume (RMB million) Corporate Source: Bank of China International (HK) Maturities ,260 2yr, 3yr, 5yr ,858 2yr, 3yr, 5yr ,710 2yr, 3yr, 5yr, 7yr, 9yr Financial Institutions ,000 2yr, 3yr ,600 2yr, 3yr, 5yr, 10yr ,100 2yr, 3yr, 5yr, 15yr, 20yr Ministry of Finance ,000 2yr, 3yr, 5yr, 10yr ,000 2yr, 3yr, 5yr, 7yr, 10yr ,000 2yr, 3yr, 5yr, 7yr, 10yr, 15yr Source: Bank of China International (HK) 28 n The RMB Internationalization Paris, a hub for Europe

29 n Pricing and investors demand..impact of the FX fluctuation: an important factor which influences bond pricing and investors demand has been the reversal of the CNY appreciation trend against the USD. During the early days of the CNH bond market, investors were buying purely as a currency play. By the beginning of 2011, the average yield on RMB bonds was around 2% but investors were expecting the CNY to appreciate by between 4% to 5%. Now that appreciation is expected to be 1% to 2%, so current yields will reflect the new foreign exchange environment. Since the announcement on April 14, 2012, that the PBoC was widening the CNY daily trading range 1% from 0.5%, the implications for the CNH bond market are positive as the gap between the offshore RMB and the onshore CNY FX rate has become narrower which reduces some of the concerns investors may have had about volatility between the two rates. Despite an increase in yields now expected to be offered to investors, there is still an economic advantage in using the CNH bond market compared with onshore bank lending. CNH Bond Pricing compared to PBoC Lending Rate AAA issuers (CNH bond) Tenor Yield Lending PBoC Rate 2 years 2% < 6 months : 5.60% 3 years 2.25% 6 months to 1 year : 6% 5 years 2.75% 1 to 3 years : 6.15% 3 to 5 years : 6.40% 7 years 3% 10 years 3.75% 15 years 4% > 5 years : 6.55% Source: Bank of China International (HK) as of 30 October No established yield curve as such and limited secondary market liquidity: so far there has not been an established yield curve: although it was the Chinese MOF s intention to develop such a yield curve through its own issuances, but market participants are not yet referencing their pricing against it. In addition, there is currently only a li mited secondary liquidity: active trading is normally restricted to the first couple of weeks following an issue and then, bonds tend to get firmly held with buy-hold investors. However, several indices were created in 2011 to track the evolution of the CNH yields: the first by Citigroup and HSBC and the second by Deutsche Borse and S&P Dowjones which will be the first index tradeable via ETF...Dominance of bond tenors below 5 years: around 70% of issues have 2 to 5 year tenors. This group of tenors attracts the largest spread of investors: banks, institutional investors, individuals and corporates, among which between 15% to 25% are foreign investors (mainly UK funds) For above 5 year tenors, the number of investors is limited to Asian/Chinese insurance companies and pension funds. Insurance companies started to write insurance contracts for their clients in RMB so they are increasingly looking for longer-dated assets to match their liabilities. The RMB Internationalization Paris, a hub for Europe n 29

30 Offshore RMB New Issue by tenor since July years 0.5% 7 years 2.2% 5 years 14.6% 20 years 0.4% 15 years 1.5% 10 years 2.3% 1 year 0.7% 2 years 22.4% 4 years 1.4% 3 years 54.0% n CNH bonds and their use of proceeds Source: Bloomberg, as of 31October 2012 FX arbitrage can offer swap opportunities by issuing CNH bonds and swapping back the proceeds into USD. Such opportunities can attract banks and corporates even if they have no natural use of RMB financing. In August 2011, China s Vice Premier reiterated Beijing s support for Hong Kong as the offshore RMB hub; a gradual relaxation of the rules for remittance into Mainland China of CNH bonds proceeds by foreign corporates was implemented. The PBoC authorizes specific types of transfers: M&A (acquisition), equity injection, intercompany loans ( shareholder loans ), working capital, debt restructuring. In addition, in May 2012, the NDRC gave approval for five Mainland state-owned enterprises to issue CNH bonds subject to investing the proceeds in appropriate Mainland fixed assets. - In October 2011, the rules governing the remittance of offshore RMB into China were significantly relaxed and clarified. For that purpose, the PBoC and the MOF issued two circulars which made the process of RMB repatriation quicker and easier. The offshore RMB bond market is becoming a mature market: improved quality of issuers, more flexible use of proceeds in Mainland China, pricing less influenced by a currency play and Hong Kong under the HKMA regulation, has not only the largest pool of liquidity but also the required professional and legal expertise. Moreover, the Hong Kong CNH bond market can be also considered as the testing ground for Chinese corporates issuing bonds under the rules of an international market with international investors. 30 n The RMB Internationalization Paris, a hub for Europe

31 B. The offshore RMB CD market An offshore certificate of deposit (CD) market has been developed in parallel to the exponential growth of the offshore RMB bond market. New Issuances of CDs and Bonds and Deposits:Monthly Increase CD new issuance Bond new issuance Deposit monthly increase /10 11/10 2/11 5/11 8/11 11/11 2/12 5/12 8/ Source: Bank of China International Offshore CNY CD Issuance: Monthly Trend (CNY millions) Jul 2010 Aug 2010 Sep 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011 Mar 2011 Apr 2011 May 2011 Jun 2011 Jul 2011 Aug 2011 Sep 2011 Oct 2011 Nov 2011 Dec 2011 Jan 2012 Feb 2012 Mar 2012 Apr 2012 May 2012 Jun 2012 Jul 2012 Aug 2012 Sep 2012 Oct 2012 Source: Bloomberg. HKMA as of 31October 2012 The current outstanding CD volume is around one third of the offshore fixed income market s size (total of CNH bonds and CDs). The main issuers of CNY CDs have been Chinese offshore banks showing a preference over bond funding particularly for shorterterm funding, because of the simpler issuance procedure, of more flexibility in tenors (long tenors 7 or even 10 years are possible) and issuance size. The execution process for a CD is shorter and cheaper than for a bond deal. Other issuers are Hong Kong banks and the The RMB Internationalization Paris, a hub for Europe n 31

32 Hong Kong branches of international banks, including French banks. Most French banks with a presence in Hong Kong have established certificates of deposit programmes allowing them to issue CDs denominated in HKD, USD and now CNY. Although a couple of RMB CDs have been issued via London (ICBC: a RMB100m CDs programme via its London subsidiary) and New York (Bank of China, NY branch: 1year, 200m CD), the offshore RMB CD market remains essentially based in Hong Kong. CDare not equivalent to savings or time deposits, though, they are perceived to be of a better credit quality than bonds. Hence, they enjoy greater support from private banking clients and corporate accounts as cash management instruments. C. The loan market It is generally accepted that, although the offshore RMB loan market is gradually developing, it will take some time before loans can challenge bonds as the main source of offshore RMB debt funding. Two reasons are usually given for this comparatively underdeveloped loan market: lack of a benchmark rate; lack of a standard loan documentation. There is at present no offshore RMB screen rate equivalent to EURIBOR or LIBOR that would give lending banks an easy reference to bid and offer rates. This is seen as the main obstacle to the development of an offshore RMB syndicated loan market. SHIBOR does exist but despite some convergence over the last 12 months, offshore rates are structurally lower than onshore rates to which SHIBOR relates. That said, some banks do publish an offshore prime rate: Bank of China (HK), HSBC and Standard Chartered starting posting their own offshore RMB offered rates on the TMA website about a year ago. And the movement is picking up pace; in April 2012, five more banks added their own prime rates on the TMA website. We are, therefore, getting closer to a HIBOR (H for Hong Kong) screen rate but we are not quite there yet. Some analysts argue that there are still discrepancies between the various prime rates posted, therefore rendering a composite rate impracticable. Whatever the reason, the fact remains that there is presently no HIBOR RMB screen rate. The documentation generally used by lenders and borrowers around the world is that of the LMA and of its Asian counterpart, the APLMA. The APLMA loan template can be adapted for offshore RMB loans. However, there is no consensus (yet) on, for example, how RMB (non-) availability (illiquidity, non-transferability, non-convertibility) should be treated. The above reasons explain the relative scarcity of offshore RMB syndicated loans. By contrast, the bilateral loan market seems to be where the real action is happening. Bilateral loans are by nature more discrete and more bespoke than syndicated loans or listed bond issues. Some bankers claim that the bilateral market is at least as big as the bond market (Anun Kuruvilla, Managing Director of Loan Markets Origination, Royal Bank of Scotland, Euroweek, Offshore RMB Bonds 2012). The terms, including the interest rate, of a bilateral loan are negotiated between a borrower and a lender, the latter normally using the offshore RMB provided by its depositors as its source of funding. This is the case of Chinese banks in Paris which are using their offshore 32 n The RMB Internationalization Paris, a hub for Europe