An Overview of Offshore RMB Market. Nov 2013

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1 An Overview of Offshore RMB Market Nov 2013

2 Contents 1. Outlook of RMB Internationalisation 2. Implications for Offshore RMB Bonds 2

3 Section 1 Outlook of RMB Internationalisation 3

4 RMB The next international currency China continues to accelerate regulatory reforms towards RMB internationalisation Second-largest global economy Largest exporter and second-largest importer in the world Inbound foreign direct investment (FDI) ranks first globally Source: BlS, The Wall Street Journal 4

5 RMB Cross-border Trade Settlement Cross-border RMB trade settlement business has developed rapidly with more balanced two-way trade flow The volume of cross-border RMB trade settlement in the second quarter of 2013 jumped 55%, compared to the same period in RMB Cross-border trade settlement (RMB billion) 16.6% 16.5% % of RMB trade volume among the total volume 14.0% 12.6% 10.2% 9.4% 8.9% 10.7% 10.8% 18.0% 16.0% 14.0% 12.0% 6 5 Inflow / Outflow Ratio % % 8.0% 6.0% 4.0% 2.0% Q1 Q2 Q3 Q4 2012Q1 Q2 Q3 Q4 2013Q1 Q2 0.0% Source: Economics & Strategic Planning Dept., Bank of China Hong Kong 5

6 Strengthening RMB usage outside Asia-pacific Western developed countries are increasingly involved in RMB businesses. New offshore RMB centers will emerge, and each will have its own niche and strength Top 10 Regions Payment (billion USD) Region 1H2013 1H2012 Rank Value % Rank Value % YoY Growth Hong Kong 1 17, % 1 8, % 107% UK 2 1, % % 203% Singapore % % 92% Taiwan % % 671% France % % 190% US % % 149% Luxembourg % % 123% Australia % % 303% Germany % % 129% Malaysia % % 499% Total 21,670* 100% 10,403* 100% 108% *Note: SWIFT recorded both sides of an transaction. To adjust the value to equate to the same reporting convention used by BIS, the total value should be divided by two. Source: SWIFT 6

7 RMB as a potential reserve currency for trade settlement Growing bilateral currency swap lines are to promote the use of RMB in global trade and finance, also a step towards RMB s achievement as a reserve currency Iceland, 3.5bn UK, 200bn ECB, 350bn Hungary, 10bn Belarus, 20bn Kazakhstan, 7bn Mongolia, 10bn Ukraine, 15bn Uzbekistan, 0.7bn Turkey, 10bn Albania, 2bn Pakistan, 10bn UAE, 35bn South Korea, 360bn Hong Kong, 400bn Thailand, 70bn Brazil, 190bn Singapore, 300bn Malaysia, 180bn Indonesia, 100bn Argentina, 70bn Australia, 200bn Bilateral currency swap agreements: 23 countries and regions, RMB 2.5 trillion Several central banks/monetary authorities have already borrowed RMB funds from the currency swaps New Zealand, 25bn Source: People s Bank of China 7

8 RMB as a potential reserve currency for investment Central banks are diversifying holdings into RMB, already helping RMB gain reserve-like attributes. Over the long run, RMB is likely to become one of the major international reserve currencies Malaysia s central bank bought RMB-denominated bonds for its reserve South Korea and Japan announced plans to invest in RMB denominated assets with their foreign reserves Nigeria s central bank added RMB to its reserves and plans to gradually increase its RMB holding to 10% Jul 2012 The Reserve Bank of Australia will invest 5% of its total foreign reserves in Chinese sovereign bonds Oct 2010 Jan 2012 Sep 2012 Apr 2013 Jun 2013 onwards ADIA, government pension fund of Norway, Qatar Investment Authority, Kuwait Investment Authority and Temasek are to invest in RMB Central Banks of Indonesia, Thailand, Cambodia and Nepal have started tilting their reserves to RMB-denominated bonds Source: People s Bank of China 8

9 Section 2 Implications for Offshore RMB Bonds 9

10 Offshore RMB Bonds Rising Supply & Demand Aug 2009 Oct RMB billion Offshore RMB Deposit in Hong Kong Commercial Bank* Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Note: Newest offshore RMB deposit data is for Sep Newest bonds data are for Oct * Including Certificate of Deposits Source: BOCHK Asset Management, Bloomberg, HKMA Corporate China Policy Banks Sovereign Supranational Bonds 10

11 Offshore RMB Bonds A Growing Asset Class 1400 Market Capitalisation in RMB 1200 Number of Outstanding Issues RMB in billions Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Oct-13 Source: BOCHK Asset Management, Bloomberg, 31 Oct

12 RMB Offshore Deposits Globally London RMB Deposit: 35 Billion (USD 5.73 Billion) Feb 2013 Luxembourg RMB Deposit: 40 Billion (USD 6.56 Billion) Aug 2013 Taiwan RMB Deposit: ~100 Billion (USD Billion) Oct 2013 Paris Hong Kong Offshore RMB Clearing Centres RMB Deposit: 10 Billion (USD 1.64 Billion) Jul 2013 RMB Deposit: 730 Billion (USD Billion) Sep 2013 Singapore RMB Deposit: 140 Billion (USD Billion) Jul 2013 Source: HKMA, MAS, Bloomberg for London, China Post for Taiwan, China.org.cn for Paris, Ministry of Finance, Luxembourg Note: 1 USD = 6.1 RMB 12

13 Onshore RMB vs Other Currencies Risk and Return vs USD from 1 Nov 2010 to 31 Oct 2013 Return vs USD RMB Latam EM Currencies Asia EM Currencies Global EM Currencies GBP Europe EM Currencies % Volatility (per annum) EUR Asia EM Currencies = JPM Emerging Local Markets ELMI Plus Asia Global EM Currencies = JPM Emerging Local Markets ELMI Plus Composite Europe EM Currencies = JPM Emerging Local Markets ELMI Plus Europe Latam EM Currencies = JPM Emerging Local Markets ELMI Plus Latin Source: BOCHK Asset Management, Bloomberg 13

14 RMB (CNY) s Resilience in the Last Two Financial Crises Asian Financial Crisis Jan 1997 to Dec 1998 Global Financial Crisis Jan 2008 to Dec 2009 RMB RMB Source: BOCHK Asset Management, Bloomberg Maximum depreciation against USD RMB: 0% JPY: 21% down ADXY *: 27% down PHP: 42% down THB: 54% down KRW: 57% down IDR: 85% down RMB: Appreciated 7% ADXY *: 11% down PHP: 18% down THB: 18% down IDR: 25% down KRW: 41% down *ADXY: JPMorgan Asia Currency Index 14

15 Market Comparison: CNH Bonds vs Other Bonds 31 Dec 2010 to 31 Oct 2013 (USD terms) FTSE - BOCHK Offshore RMB Bond Index much lower volatility Source: Bloomberg 15

16 Conclusions Investment opportunities Offshore RMB bonds: Yield pick-up in both nominal and real terms Diversification-low correlation with other major bond markets Currency appreciation potential Market segmentation conducive to active management Opportunities arisen from RMB internationalization A new tool for wealth storage Advantages of the FTSE-BOCHK Offshore RMB Bond Index Series Combining the index expertise of FTSE and market knowledge of Bank of China (Hong Kong) Ltd Independent index committee for good Corporate Governance Part of the FTSE global index family for Quality and Consistency 16

17 Notes and Disclaimers Information herein may be obtained from sources believed to be reliable, but BOCHK Asset Management Limited does not guarantee the accuracy of the information. The opinions expressed herein should not be considered to be a recommendation or solicitation to buying or selling of any securities or products. Investment involves risks. Past performance is not indicative of future performance. Investor may lose substantial part of the investment. Investor should not make investment decision based only on this material and should read together with the Explanatory Memorandum ( EM ) for more information. If in doubt, investor should obtain independent professional advice. This document is issued by BOCHK Asset Management Limited and has not been reviewed by the Securities and Futures Commission ( SFC ) of Hong Kong. SFC authorization is not a recommendation or endorsement of a product nor does it guarantee the commercial merits of a product or its performance. It does not mean the product is suitable for all investors nor is it an endorsement of its suitability for any particular investor or class of investors. 17

18 Thank you 18

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