Shanghai Clearing House plans to setup SFTZ bond market as early as in May. PBoC releases foreign reserves data denominated in SDR

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1 RMB Focus MAY 2016 I. Highlights of Foreign Official Institutions to access CIBM and FX market Implemental rules on pilot offshore financing scheme Pilot offshore financing scheme expanded to whole mainland China II. Shanghai Clearing House plans to setup SFTZ bond market as early as in May First Corporate Green Bond was issued in CIBM First IRS under FTU system was settled Shanghai Gold Exchange launches RMB gold fixing SAFE will develop FX derivatives products PBoC releases foreign reserves data denominated in SDR HKEx will launch additional RMB currency futures in Q HKEx plans to establish metal trading in mainland China Shanghai-London Stock Connect may be launched in September 2016 Clearstream and CIBM work on connection Euronext and Chinese data vendors sign accord to facilitate access World Bank and AIIB agree to finance joint projects FDI in China continues its growth momentum in Q1 RMB Competence Centre - Page 1

2 I. PBoC on April 14 th released detailed rules regarding procedures for Foreign Official Institutions (FOIs) to access China Interbank Bank Market (CIBM) and Foreign Exchange (FX) market. Investing in CIBM FOIs can access the CIBM directly, or via PBoC or banks with Interbank Bond Settlement Agent licence. FOIs are able to trade Cash bond, bond repurchase, bond lending, bond forward, Interest Rate Swap (IRS), Forward Rate Agreement (FRA) and other instruments permitted by PBoC. FOIs can invest in CIBM without quota restriction after registration with PBoC. FOIs are encouraged to make long-term investments and the funds can be repatriated freely. For trading derivatives, either NAFMII Master Agreement or ISDA Master Agreement is acceptable. Trading in interbank FX market FOIs can link to CFETS directly, or via PBoC or other FX market members. FOIs can trade all listed products, including spots, forwards, swaps (FX swap and cross currency swap) and options. All listed currencies including USD, EUR, JPY, HKD, GBP, etc. are available for trading in interbank FX Market. Transactions can be conducted through bilateral and automatic matching (anonymous). There is no quota limit, but all transactions shall abide by related Chinese laws and regulations. Repatriation of funds is allowed. RMB funds exchanged by offshore FOIs from foreign currency to be invested in the Interbank FX Market must first be deposited in accounts opened in China. Afterward, the funds may either be used in China or be transferred overseas without prior approval. Either NAFMII Master Agreement or ISDA Master Agreement is acceptable. With interbank bond settlement agent and FX market member licences, BNP Paribas (China) Ltd. is eligible to provide full agency services to offshore FOIs for investing in CIBM and trading in FX market. RMB Competence Centre - Page 2

3 Pursuant to PBoC Circular No.18, 2016 on pilot offshore financing scheme which allowed or net asset, SAFE further released implemental rules in April to guide offshore financing business. The pilot offshore financing scheme is applicable to both Chinese domestic companies and foreign invested enterprises (FIEs) registered in Shanghai, Tianjin, Guangdong and Fujian free trade zones (FTZs) and 27 banks piloted by PBoC. However, FIEs can choose to apply to this new pilot scheme or keep the existing foreign debt quota policy (also known as t cannot be changed except with special approval. Under this new pilot offshore financing scheme, corporates are required to file the foreign debt information with SAFE in respect of the relevant offshore financing transactions within 3 working days after the drawdown. Both short-term and long-term foreign debt quota of corporates are managed on a balance control basis. Pilot enterprises can hold the existing foreign debt till the maturity, in case the risk weighted X-border financing balance is greater than the limit due to the adjustment of risk -border financing or renewal of existing financing is prohibited until the risk weighted balance is adjusted within the limit. The FCY foreign debt borrowed can be converted to RMB based on real needs. The foreign debt drawdown and repayment shall be conducted in the currency mentioned in contract. U risk weighted offshore financing outstanding balance. Previously, coefficient of 0.2 was applied to trade financing in FCY. With both onshore and offshore platforms, BNP Paribas can provide corporates with offshore financing services and related FX hedging solutions. The pilot offshore financing scheme (PBoC Circular No.18) is expanded to whole mainland China from May 3 rd. All the rules remain unchanged except the eligible entities. Onshore financial institutions (including BNP Paribas China) and corporates are now qualified to borrow from offshore based on their capital or net assets without pre-approval from PBoC/SAFE. BNP Paribas China is qualified to raise funds from offshore. It also presents the loan opportunity for Corporate Banking business of offshore BNP Paribas branches. For detailed rules on pilot offshore financing, please refer to our analysis in February RMB Focus. RMB Competence Centre - Page 3

4 II. The Shanghai Clearing House (SHCH) is planning to establish a Shanghai Free Trade Zone (FTZ) bond market, allowing entities incorporated in SHFTZ to issue bonds denominated in CNH. The proceeds can be used freely either onshore within the FTZ or offshore. Offshore CNH investors would be able to invest in the bonds without any quota restrictions. In addition, regulations regarding accounting and auditing standards may be less strict compared to Panda Bond Issuance. Such scheme could be viewed as a way to move dim sum market to the FTZ, signaling that China is encouraging more foreign investors to place money onshore. Source: Global Capital Concord New energy issued on April 7 th the first RMB 200 million three-year Green Note with a coupon rate of 6.2% in CIBM and it has been granted permission to issue up to RMB 500 million of green bonds. Funds raised will be fully used for green projects, including two photovoltaic projects and three wind power projects. The structure of this green note is strictly in line with the International Green Bond Principle and engages third party to conduct independent assessment. Currently, NAFMII is reviewing the standard rules for the issuance of corporate green bond in CIBM. channel for corporates to finance projects in clean energy and environmental protection sectors. BNP Paribas (China) Ltd. is eligible to be the underwriter of green financial bond issuance in CIBM and the financial advisor for green corporate bond issuance in CIBM and SSE. Source: BNP Paribas; NAFMII On April 8 th, 1 st IRS via Free Trade Accounting Unit (FTU) system was successfully settled, representing a breakthrough in the development of interest rate derivatives in the SHFTZ. The non-deliverable IRS is denominated in RMB and cash settled in USD with 7-day repo fixing (FR007) as its floating rate. Source: BNP Paribas; CFETS Online RMB Competence Centre - Page 4

5 The Shanghai Gold Exchange started a daily RMB gold fixing on April 19 th, in an attempt to establish a regional benchmark and bolster its influence in the global gold market. China has overtaken India to be the largest bullion consumer as rising incomes and surging economic growth boosted purchases of jewelry, bars and coins. The move will also promote the international use of yuan and expand its role as a global currency. Source: Bloomberg As capital outflows from China continued to stabilise in March, China will implement various measures to further liberalise FX market and promote the unification of yuan exchange rates onshore and offshore. In detail, SAFE will develop more FX derivative products, improve trading system and expand market players to help domestic firms hedge currency risks. Source: Reuters PBoC started to release foreign reserves data denominated in both the US Dollar and Special Drawing Rights (SDR) on April 7 th, with the aim to reduce valuation changes caused by large fluctuations in specific major currencies. The SDR, consisting of a basket of currencies, tends to be more stable than individual currencies, and thus can be a more objective reflection of foreign reserve figures. As RMB will be officially included into SDR on October 1 st 2016, PBoC is calling for broader use of SDR to improve its role as a unit of account as well as increase the international use of RMB. Source: PBoC HKEx has announced its plans to launch new renminbi currency futures in Q2, a move to provide more channels for investors to diversify portfolios and hedge RMB risks. EUR/CNH, JPY/CNH and AUD/CNH future contracts with cash settled in RMB and CNH/USD future contracts with cash settled in USD will soon be released in HKEX. Since the launch of the first physically-delivered USD/CNH future contracts in 2012, the offshore RMB futures have gone from strength to strength. In February, more than 3700 contracts were traded in HKEX with the daily turnover hitting a record high. Source: HKEX; Bloomberg RMB Competence Centre - Page 5

6 HKEx will establish a metal-trading platform in Qianhai, which is the first physical expansion to mainland China and a major step to further grow its commodities business. HKEx has already set up a company in Qianhai as the first step for the bourse to prepare to introduce its metal-trading platform and warehouse for physical delivery in mainland. However, the exact timing of the launch is unknown and it would still need approval from the mainland securities watchdog and other related authorities. Source: South China Morning Post - According to Hong Kong Economic Journal, the Shanghai-London Stock Connect will be rolled out in September, with global depositary receipts initially used to gauge market reaction. No more than 10 Shanghai-listed Chinese companies, with the largest capitalisation, will issue Global Depository Receipts (GDR) to be listed on the London bourse. Chinese banks, insurers and oil companies may be included in the first batch of GDR issues. FTSE 100 Index constituent stocks, including British American Tobacco and drug maker GlaxoSmithKline will also trade on the Shanghai Exchange. Source: Hong Kong Economic Journal Deutsche Börse AG's Clearstream unit will open a conduit to China's interbank bond market in the fourth quarter. Currently, Clearstream holds approximately EUR 13.4 trillion central securities deposits, among which EUR 1.4 trillion are from central banks. The agreement would make Clearstream the only international central securities depository (ICSD) with a direct link to China's interbank market, where authorities have recently taken steps to boost access for foreigners. Such agreement will also consolidate the bilateral cooperation between two markets and push forward RMB internationalisation. Source: Daily Mail On April 21 st, Euronext and three main data vendors (East Money, Shanghai DZH Limited and Shanghai Wind Information) in China signed an accord to facilitate access to the pan-european market data for Chinese investors. The agreement will further enhance the visibility and accessibility of markets, listed companies and products in Euronext as well as expand the Chinese Source: Xinhua RMB Competence Centre - Page 6

7 On April 13 th, World Bank and the Asian Infrastructure Investment Bank (AIIB) signed the first cofinancing framework agreement, paving the way for further cooperation on joint projects regarding transport, water and energy. Such agreement is an important trial towards financing AIIB expects to approve about USD 1.2 billion in financing, with the World Bank joint projects anticipated to account for a sizable share. Source: Xinhua FDI in the Chinese mainland continued to rise in Q1 with a year-on-year growth of 4.5%, topping RMB billion. During the period, investment in the service sector accounted for 68.9% of total inflow, reaching RMB billion; FDI in the high-tech service industry soared 104.3% year on year to RMB billion; and investment from countries along routes of the Belt and Road remained robust, up by 8% from a year ago to USD 1.84 billion. Source: Xinhua RMB Competence Centre - Page 7

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