Clearstream Optimising Renminbi liquidity

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1 Clearstream Optimising Renminbi liquidity

2 2 Optimising Renminbi liquidity

3 Optimising Renminbi liquidity 3 Offshore Renminbi - maximising the potential We have the ability to act as a reciprocal gateway between Chinese and non-chinese investors and issuers. Ever since the launch of the offshore Renminbi programme in 2009, there has been an impressive appetite for this growing world currency. And, with China s recent measures aimed at internationalising its currency, never before has the potential for offshore Renminbi outside the Greater China Region been so pronounced. China is the second largest economy in the world with its currency currently standing in 8 th place as a world payment currency by value, having increased from 20 th since 2012, according to SWIFT s recent publication of statistics. That being said, the offshore Renminbi accounts for less than 9% of global trade finance volume. When compared to the USD, which accounts for more than 81%, it is clear there is a large gap between the currencies of the world s two largest economies, indicating a clear growth potential for the offshore Renminbi at international level. Currently, one of Clearstream s most exciting developments is our ambitious plan to actively leverage our existing services and infrastructure to increase global liquidity in offshore Renminbi, develop the market for offshore Renminbi bonds and facilitate the growth of investment and innovation of banking products and services in this currency. By leveraging our international infrastructure, we have the ability to act as a reciprocal gateway between Chinese and non-chinese investors and issuers. At the same time we will continue to develop our network of global partners in order to maximise liquidity in this growing currency. Our well-established partnerships with the global banks, domestic infrastructures and local agents will boost offshore Renminbi cash management capabilities by ensuring there are sufficient cash reserves available to participants both during the Asian business day and extending into European trading hours. We are continuously seeking new partners to join this network. Simultaneously, our award-winning collateral management platform, the Global Liquidity Hub, will greatly enhance efficiency of the offshore Renminbi cash market.

4 4 Optimising Renminbi liquidity Significant benefits for the global market The potential benefits a strengthened offshore Renminbi could bring, not only to China and Chinese investors but to the global market as a whole, are significant. Currently, the finite supply of offshore Renminbi cash and products limits the growth of the market. Investors, issuers and businesses interested in transacting in the currency would, undoubtedly, do more if there was more liquidity. In short, the increase of liquidity is an integral step in promoting the internationalisation of the Chinese currency. Clearstream s vision is to leverage its capacity and infrastructure, drawing on its global linkages, partners and client base, to bring together both supply and demand on a global level. In doing so, we can facilitate greater liquidity in the amount of available offshore Renminbi. Extending the availability beyond the geographical boundaries and time-zones of Asia, to European and American markets also remains a challenge we seek to address, and which further promotes liquidity of both the currency and products on a global level. One possible avenue for achieving this would be the emergence of an offshore Renminbi infrastructure hub in Europe, which could be linked directly to the existing offshore Renminbi centres and to China itself. Ensuring the liquidity of offshore Renminbi as a settlement currency will in turn increase the possibility for issuance of these securities and further investment in both the international and domestic markets. As liquidity grows, so too does the potential. China and Chinese investors will benefit from lower offshore Renminbi funding costs in offshore markets, while investors domiciled outside China and Asia will have the opportunity to increase their exposure to the economically strong and growing Chinese market with the potential for significant currency appreciation. A cornerstone of Clearstream s business strategy is to facilitate and support our customers increasing demand to invest in the Asian markets. The internationalisation of the RMB that the Chinese authorities pursue is currently one of the most exciting developments in this space that we, as a core market infrastructure provider, have been supporting since the early days. Together with our partners, we intend to further develop a promising roadmap of how to offer large scale solutions for the market to benefit from the RMB developments. Jeffrey Tessler, CEO Clearstream December 2013

5 Optimising Renminbi liquidity 5

6 6 Optimising Renminbi liquidity Timeline of the offshore Renminbi market July 2008 Mid July 2010 August 2010 April 2011 Offshore Renminbi appreciates 21% against the USD within three years of China giving consent for appreciation. China again pegs offshore Renminbi to USD in response to global financial crisis. Offshore Renminbi programme piloted, starting with 359 companies (Mainland Designated Enterprises (MDE)) from five Chinese cities plus Hong Kong and Macau. Programme later extended to cover 20 Chinese provinces and the rest of the world. By end of 2010 around 67,000 MDE listed. First offshore Renminbi bond issued by a nonfinancial Chinese issuer. Also, this month the offshore Renminbi is allowed again to start appreciating. First offshore Renminbi bond announced by a foreign corporate, issued in Hong Kong. First initial public offering (IPO) of offshore Renminbi issued in Hong Kong.

7 Optimising Renminbi liquidity 7 Did you know? RMB, CNY, CNS and CNH unravelled Several symbols for the same currency can, at first glance, seem rather confusing. The CNY is the official ISO currency code (whether on or offshore) for the Renminbi, or Yuan as it can also be called. The currency can also be referred to as the CNH in Hong Kong, CNS in Singapore, RMB as a general abbreviation or offshore Renminbi. If you re feeling confused, let us show you how we navigate the Chinese currency. At Clearstream, we use the official ISO currency code of CNY at all times as this currency code is used in all transactions regardless of where the transaction takes place. When we speak or write about it we call it the offshore Renminbi. What is a Dim Sum bond? A Dim Sum bond is a bond denominated in offshore Renminbi and issued outside China. You might also hear the term Formosa bond for bonds issued in Taiwan or Lion bond for those issued in Singapore. To avoid confusion, we refer to all these bonds as offshore Renminbi bonds. Offshore Renminbi facts and figures Clearstream s settlement in offshore Renminbi rose from 270 bn in 2012 to 632 bn in Offshore Renminbi has risen in the SWIFT currency ranking from 20 th in January 2012 to 8 th in November 2013.* Globally, 73% of treasurers think the offshore Renminbi will be at least the world s third most important currency within 10 years.** * source SWIFT ** source Standard Chartered Bank Mid November 2012 January 2013 October 2013 October 2013 Settlement in offshore Renminbi of China s total trade reaches 10%. Deposits in Hong Kong reach 554 bn CNY. Clearstream supports the issuance of more than CNY 84 bn of international bonds spread over 579 new issues, an increase of more than 71% compared with Clearstream Clearstream acts as facilitates the sole and exclusive primary distribution international of a CNY 1 bn central securities bond issued by depository (ICSD) CCBL Funding for the primary PLC. Significantly, distribution of this was the first two new offshore issuance on the Renminbi bonds international market from China by a Chinese bank Construction Bank outside China and Bank of China and Hong Kong. Hong Kong. We successfully supported the issuer and issuing agency from our Luxembourg, London and Singapore offices. European Central Bank and People s Bank of China establishes a three-year bilateral currency swap agreement with a maximum size of 350 bn CNY and 45 bn EUR. 1 st issuance of an international bond by the Industrial and Commercial Bank of China.

8 8 Optimising Renminbi liquidity Extending our offering and deadlines Hong Kong remains the dominant location for offshore Renminbi. For example, between May 2009 and December 2013, offshore Renminbidenominated deposits increased nearly 20-fold from around RMB 50 bn to RMB 860 bn. Clearstream has been actively offering offshore Renminbi as a settlement currency since September 2010 when it launched its service in Hong Kong, using the same link that was already established for the Hong Kong dollar (HKD). And, the potential to extend further is already in view. Our current project to lengthen our ICSD settlement day (the first phase, a two-hour extension due April 2014) will cumulate in coverage of the full processing day within the North and Latin American region by the end of The two elements go hand-in-hand: without more liquidity the market can only use the finite amount of offshore Renminbi international market participants already hold after the close of the Hong Kong business day. We will extend offshore Renminbi cash deadlines by up to eight hours. By working with our Chinese partners to bring a cash management solution to Europe, Clearstream can facilitate sufficient offshore Renminbi liquidity in Europe after the Hong Kong market has closed. We will also be able to extend offshore Renminbi cash deadlines beyond the close of the Hong Kong operating day until the end of the European business day at least an extension of up to eight hours. We currently have a wide range of offshore Renminbi asset types in our books, including certificate of deposit and short term notes, convertibles, equities, Euro-commercial paper, fixed rate Eurobonds and other bonds, floating rate notes and warrants.

9 Optimising Renminbi liquidity 9 Triparty repo solutions managing repo using triparty services Clearstream is continuously voted top-rated for our triparty repo services. One way to increase interbank market liquidity is through repurchase agreement markets. Having explored many options, we believe the most effective solution is a triparty repo service where Clearstream supports the cash provider and the cash taker with collateral management services. Clearstream has been offering a triparty repo service since 1992; just one of the multitudes of collateral management services available on Clearstream s award-winning Global Liquidity Hub, where both buy and sell side can meet and leverage our liquidity pool thus reducing cost, effort and time. By opting for a triparty repo service both the cash provider and the cash taker outsource day-to-day operations relating to the repo to Clearstream as their collateral agent. This will free up resources to focus more on the principal side of the transaction. The tremendous success of Clearstream s triparty services over the past 20 years has demonstrated its attractiveness in terms of operational efficiency, risk management and cost. Given the low cost aspect of it, triparty repo has been the main entry point to the repo market for banks, asset managers and corporates. Triparty repos constitute a unique solution resulting in low-cost investments for cash providers and high operational efficiency for cash takers. In 2014, Clearstream, together with the Hong Kong Monetary Authority (HKMA), will launch a triparty repo service for the offshore Renminbi market in Hong Kong. Based on bilateral repo agreements between the Hong Kong based cash provider in offshore Renminbi and the international cash taker, Clearstream will act as the central collateral manager for the HKMA in managing the collateral. Cash provider (Collateral receiver) Trade details Currency Principal Repo rate Collateral basket Trade dates Cash taker (Collateral giver) Cash Triparty collateral account Securities

10 10 Optimising Renminbi liquidity Facilitating the increase of issuance We continue to proactively promote the issuance of the offshore Renminbi bond. < 12 months 1 to 2 years 2 to 5 years > 5 years Clearstream has been issuing bonds denominated in offshore Renminbi for a decade. We first started issuing dual currency bonds in 2004 and in 2012 we became the first ICSD to issue an offshore Renminbi bond (a single currency bond denominated in CNY) on the international market. We continue to proactively promote both the issuance of these bonds and the steady growth of the international offshore Renminbi bond market. Tenor of bonds issued between 2010 and 2013* 19.51% 8.48% 53.33% 18.69% Our experience in issuing offshore Renminbi bonds indicates that the market is still in its beginning stages, needing to develop maturity but also showing signs of high growth potential. Like any developing bond market, the majority of issuance in both the international and domestic markets continues to be short tenor of less than two years, a relatively small average issuance size of 150 m CNY, and the market continues to be mostly buy and hold. Our approach to further develop this market and grow the size and quality of securities issued, is to work directly with the issuer community to attract new issuers to the market, draw more issuers with higher credit ratings and to facilitate experienced issuers to issue larger bonds with longer tenor. Improving the pool of issuers, coupled with our active involvement to enhance offshore Renminbi liquidity and diverse international investor reach, will certainly enable the offshore Renminbi bond market to grow. It will also add synergistic benefits overall across industry, financial sectors and many other business sectors. International CNY bonds issued Total amount issued (CNY m) Number of bonds issued * CNY bonds issued on the international market before 11/2012 were dual currency bonds, denominated in CNY with income and redemption in other currencies. Source REUTERS Total amount of bonds issued 160, , , ,000 80,000 60,000 40,000 20, * 2011* 2012* 2013 Number of bonds issued 1,200 1,

11 Optimising Renminbi liquidity 11 Developing new offshore products and services We have worked hard with our partners in the region to understand this unique environment and are finding ways to evolve the tools and infrastructure to operate more efficiently in this environment, such as improving liquidity, cross-border interoperability as well as enriching the general understanding of how the unique framework of this currency works. A couple of areas we are looking into is the use of offshore collateral to secure ties for onshore funding needs as well as how to facilitate our customers development of offshore Renminbi trade finance products and services. In order for this to be successful it is important to think out of the box. We are confident our ambitious project has the potential to significantly increase the role of offshore Renminbi internationally and to ease access to this currency for market players throughout the world. But, in order for this to be successful it is important to think out of the box. China is a unique market due to its onshore/offshore rules and regulations of movement in and out of the country. We also believe our knowledge in the funds area, coupled with the expertise of key players of these services who are already our partners, can pave the way for increased products and services targeted at direct offshore Renminbi investment in China. For example, we want to encourage fund managers and asset managers to create funds that will be available onshore for offshore investors and also funds for offshore investment by onshore investors. This is a development we can actively help to promote.

12 Clearstream Banking SA 42 Avenue JF Kennedy L-1855 Luxembourg Phone /02.14

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