Predicting CNY New Challenges Philip Wee Group Research July 4, 2014 Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to parties outside the presentation. DBS Bank accepts no liability whatsoever with respect to the use of this document or its contents.
CNY How many are there? Onshore Offshore Quest ion Official PBOC Parity HKAB fixing HK SAR is part of China CNH Market CNY considered NDF Why is CNH offshore? Shanghai Free Trade Zone Taiwan, Singapore London, Paris Luxembourg Convert- Capital Current ibility account account Source: DBS Research 2
Ot hers More countries / regions / financial centres are using and trading CNY CNY is second most used currency for cross-border payments with China & HK CNH trading in 2013 % share 70 60 % of international traffic sent in value 58 66 US 5% 50 40 May13 May14 38 Singapore 13% 30 20 23 29 London 19% Hong Kong 61% 9 10 3 0 North Af rica Asia EUROPE Middle Lat in America Pacific EZ Non-EZ East America Source: SWIFT Source: ThomsonReut ers 3
Swift rise of CNY as World Payments Currency China is not far from meeting the IMF s qualification for capital account convertibility (PBOC Chairman Zhou Xiaochuan) Customer initiated & institutional payments. Inbound + Outbound traffic. Based on value Jan 2012 Rank Jan 2013 Rank Jan 2014 May 2014 EUR 44.04 1 EUR 40.17 1 USD 38.75 USD 41.63 USD 29.73 2 USD 33.48 2 EUR 33.51 EUR 32.35 GBP 9.00 3 GBP 8.55 3 GBP 9.38 GBP 8.27 JPY 2.48 4 JPY 2.56 4 JPY 2.49 JPY 2.21 AUD 2.08 5 AUD 1.85 5 CAD 1.80 AUD 1.81 CAD 1.81 6 CHF 1.83 6 AUD 1.75 CAD 1.71 CHF 1.36 7 CAD 1.80 7 CNY 1.39 CNY 1.47 SEK 1.05 8 SGD 1.05 8 CHF 1.38 CHF 1.32 SGD 1.03 9 HKD 1.02 9 HKD 1.09 SEK 1.10 HKD 0.95 10 THB 0.97 10 THB 0.98 HKD 1.06 NOK 0.93 11 SEK 0.96 11 SEK 0.97 SGD 0.89 THB 0.82 12 NOK 0.80 12 SGD 0.88 THB 0.85 DKK 0.54 13 CNY 0.63 13 NOK 0.80 NOK 0.82 RUB 0.52 14 DKK 0.58 14 DKK 0.60 PLN 0.54 ZAR 0.48 15 RUB 0.56 15 PLN 0.59 DKK 0.42 HUF 0.34 16 ZAR 0.42 16 ZAR 0.41 NZD 0.42 NZD 0.33 17 NZD 0.33 17 RUB 0.40 ZAR 0.41 MXN 0.31 18 MXN 0.34 18 MXN 0.39 RUB 0.35 TRY 0.27 19 TRY 0.29 19 NZD 0.35 TRY 0.34 CNY 0.25 20 HUF 0.25 20 TRY 0.34 MXN 0.34 Source: SWIFT 4
CNY internationalization brace for more Trade settlement in CNY Lending & Investment in CNY 20000 18000 China's Deposits $17.5 t rillion 186% /GDP 20000 18000 16000 14000 12000 US GDP $17.1 t rillion China's Loans $12.0 trn 128% /GDP China's Net Deposits $5.5 t rillion 58% /GDP LDR <70% 16000 14000 12000 10000 8000 China GDP $9.4 t rillion 10000 8000 6000 4000 2000 China's Total trade $4.2 t rillion 44% /GDP 6000 4000 2000 0 05 06 07 08 09 10 11 12 13 14 15 0 Sources: DBS Research, CEIC data 5
Onshore CNYs How they have changed The First 5 Years 2005 to 2009 The Next 5 Years 2010 to 2014 8.40 Jul 2005 Official trading band 8.20 CNY peg freed Parity Official CNY 8.00 7.80 Spot Market CNY Jul 2005 ±0.3% band 7.00 6.80 6.60 6.40 7.60 7.40 7.20 7.00 6.80 6.60 May 2007 ±0.5% band High Growth High Inflation Lehman crisis CNY stable 5.20 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 6.20 6.00 5.80 5.60 5.40 Apr 2012 ±1% band EU crisis Slower Growth Stable Inflation Mar 2014 ±2% band * DBS f orecast ; * * Jun 2014 GDP 11.3 12.7 14.2 9.6 9.2 % GDP 10.4 9.3 7.7 7.7 7.5* CPI 1.8 1.5 4.8 5.9-0.7 YoY CPI 3.3 5.4 2.6 2.6 2.7* Parit y 2.6 3.3 6.9 6.9 0.1 % Parit y 3.1 5.1 0.2 3.1 0.4* * CNY 2.6 3.4 6.9 7.1-0.1 YoY CNY 3.6 4.7 1.0 2.9-1.3* * Official & Market CNY MOSTLY near each other Official & Market CNY NO LONGER near each other Sources: DBS Research, Reuters data 6
Predicting CNY More challenging Official CNY Appreciation bias Market CNY Depreciation possible 12 10 % YoY vs USD Legend CNY parity, CNY spot 8 6 4 2 0-2 Jul 2005 ±0.3% band May 2007 ±0.5% band Lehman crisis EU crisis Apr 2012 ±1% band -4 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Mar 2014 ±2% band Sources: DBS Research, Reuters data 7
Official SGD NEER vs Market USD/SGD China is not the only country with two currencies 130 1.60 125 USD/SGD (right) 1.50 120 Stronger SGD 1.40 115 110 105 MARKET SGD appreciating MARKET SGD flat 1.30 1.20 100 95 POLICY SGD neutral 1.10 1.00 90 DBS SGD NEER & policy band (left) Stronger SGD 0.90 85 2008 2009 2010 2011 2012 2013 2014 0.80 Sources: DBS Research, Reuters data 8
Official CNY Parity vs Market CNY Official CNY vs Inflation Price Stability M arket CNY vs Exports Competitiveness 12 10 CNY parity vs USD (% YoY, right) 60 50 CNY vs USD (% YoY, right) 12 10 8 40 8 6 30 6 4 20 4 2 10 2 0 0 0-2 -4 Band w idening CPI inflation (% YoY, left) -10-20 Band w idening Exports fob (% YoY, 3mma, left) -2-4 -6 05 06 07 08 09 10 11 12 13 14-30 05 06 07 08 09 10 11 12 13 14-6 Sources: DBS Research, CEIC & Reuters data 9
Step 1 Predict Parity (Policy CNY) 7.00 6.90 6.80 6.70 6.60 6.50 6.40 6.30 6.20 6.10 6.00 5.90 5.80 Upper half Lower half DBS f or ecast USD/CNY Parit y Band wid ening Descending Price channel Gradient estimated as 2.5% appreciation pace 5.70 08 09 10 11 12 13 14 15 7.00 6.90 6.80 6.70 6.60 6.50 6.40 6.30 6.20 6.10 6.00 5.90 5.80 5.70 China's real GDP grow th, % YoY DBS forecast in bold red 2008 2009 2010 2011 2012 2013 2014f 2015f YR 9.9 9.0 10.4 9.4 7.7 7.7 7.5 7.5 I 11.3 6.6 12.1 9.8 7.9 7.7 7.4 7.5 II 10.8 8.2 10.3 9.5 7.6 7.5 7.5 7.5 III 9.7 9.7 9.6 9.2 7.4 7.8 7.5 7.5 IV 7.6 11.4 9.8 8.9 7.9 7.7 7.5 7.5 China's CPI inflation, % YoY 2008 2009 2010 2011 2012 2013 2014f 2015f YR 5.9-0.7 3.3 5.4 2.7 2.6 2.7 3.2 I 8.0-0.6 2.2 5.1 3.8 2.4 2.3 3.2 II 7.8-1.5 2.9 5.7 2.9 2.4 2.6 3.2 III 5.3-1.3 3.5 6.3 1.9 2.8 2.8 3.2 IV 2.5 0.7 4.7 4.6 2.1 2.9 3.0 3.2 Sources: DBS Research, Reuters data 10
Step 2 Predict Spot (Market CNY) 7.00 GDP No hard landing, will meet 7.5% target 6.90 6.80 6.70 6.60 CPI Rebounds from <2% but will not >3.5% Trade To stabilize & recover on exports 6.50 6.40 Upper half Lower half 6.30 DBS forecast 6.20 USD/CNY Parity 6.10 6.00 5.90 USD/CNY Spot Band wid ening 5.80 5.70 08 09 10 11 12 13 14 15 7.00 6.90 6.80 6.70 6.60 6.50 6.40 6.30 6.20 6.10 6.00 5.90 5.80 5.70 China's real GDP grow th, % YoY DBS forecast in bold red 2008 2009 2010 2011 2012 2013 2014f 2015f YR 9.9 9.0 10.4 9.4 7.7 7.7 7.5 7.5 I 11.3 6.6 12.1 9.8 7.9 7.7 7.4 7.5 II 10.8 8.2 10.3 9.5 7.6 7.5 7.5 7.5 III 9.7 9.7 9.6 9.2 7.4 7.8 7.5 7.5 IV 7.6 11.4 9.8 8.9 7.9 7.7 7.5 7.5 China's CPI inflation, % YoY 2008 2009 2010 2011 2012 2013 2014f 2015f YR 5.9-0.7 3.3 5.4 2.7 2.6 2.7 3.2 I 8.0-0.6 2.2 5.1 3.8 2.4 2.3 3.2 II 7.8-1.5 2.9 5.7 2.9 2.4 2.6 3.2 III 5.3-1.3 3.5 6.3 1.9 2.8 2.8 3.2 IV 2.5 0.7 4.7 4.6 2.1 2.9 3.0 3.2 Sources: DBS Research, Reuters data 11
US sees trade as a drag on its economy IMF reforms Not before US mid-term elections in Nov 2014 TPP trade talks Urgency to complete talks asap China needs to rely less on net exports US trade deficit USD billion 0-50 -100-150 -20-30 -40-50 -60-70 Legend monthly data 12mth mov ave 01 02 03 04 05 06 07 08 09 10 11 12 13 14-200 -250-300 -350-400 US trade balance with China, USD billion US trade deficit in 2013 = USD476 bn 2Q14 = Apr 1Q 2Q 3Q 4Q 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 US real GDP % QoQ annualized 10 5 0-5 -10 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Sources: DBS Research, CEIC data 12
US CNY is substantially undervalued Fed's balance sheet > China's reserves China's deposits vs US federal debt 4500 4000 3500 3000 USD billion China's foreign reserves China's total trade 20 18 16 14 12 USD t rillion US GDP US federal debt China's deposits 2500 Fed's balance sheet 10 2000 1500 8 6 4 China' s GDP 1000 2 500 05 06 07 08 09 10 11 12 13 14 0 05 06 07 08 09 10 11 12 13 14 Sources: DBS Research, US Federal Reserve, CEIC data 13
CNY outlook remains constructive CNY internationalisation advancing despite weaker CNY in 1H14 Predicting CNY becomes more challenging Parity CNY Price Stability (Appreciation bias) Market CNY Export Competitiveness (Depreciation possible) CNY appreciation resumes when Government Commits to 7.5% growth target Commerce Ministry Optimistic about trade growth again Central bank Vigilant on inflation US to pressure for stronger CNY ahead of mid-term elections Fed s balance sheet > China s foreign reserves China s deposits > US GDP 14
Disclaimer Disclaimer: The information herein is published by DBS Bank Ltd (the "Company"). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. 15
RMB Internationalisation Where are we now? Moderated by Andrew Ng, Group Executive, Treasury & Markets, DBS Bank Panellists: Philip Wee, Senior Economist, DBS Bank Jacky Tai, Head of Treasury & Markets, DBS China Leung Tak Lap, Head of Advisory Sales, DBS Greater China Clifford Lee, Head of Fixed Income, DBS Bank Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to parties outside the presentation. DBS Bank accepts no liability whatsoever with respect to the use of this document or its contents.
Introduction to Free Trade Account (FTA) On 21 May 2014, Shanghai PBOC released 2 rules regarding the Free Trade Account (FTA) Foundation for deepening the financial reforms Promoting the innovation of cross-border financing and investment. Entity Individual Onshore (FTZ) FTE (for FTZ Entity) FTI (for FTZ Individual) FTU (for Financial Institution) Offshore FTN (for Offshore Entity) FTF (for FTZ Foreign Individual) 17
FTA Applicable for Foreign Entities/Individuals Tag Account Applicable Holder Applicable Financial Institutions FTE FTZ Entities FTZ Entities: 1. Enterprises legally incorporated in the FTZ 2. FTZ branches/rep offices of offshore entities Shanghai financial institutions FTN Offshore Entities Legal entities incorporated offshore (including Hong Kong, Macau and Taiwan) FTZ financial institutions FTF FTZ Foreign Individuals FTZ Foreign Individuals: a foreign natural person (including Hong Kong, Macau and Taiwan) holding foreign identification document but worked in FTZ for more than one year under PRC work permit FTZ financial institutions 18
Transfer of Funds Offshore Accounts Onshore Accounts FTA Nonresident Accounts Restricted transfer 4 types are allowed a)current account transactions; b)repayment of RMB loans borrowed by FTA holder from Shanghai financial institutions with a tenor of more than six months (exclusive); c)industrial investment such as construction of new projects, M&A or capital increase, etc.; d)other cross-border transactions permitted by PBOC Shanghai Head Office. 19
Products and Service Provided By DBS RMB Offshore Loan Entities in PFTZ can borrow RMB from overseas. The borrowed RMB funds can be used in the PFTZ or overseas Including production and operation in PFTZ, construction project in PFTZ, offshore construction project, etc. Two-way Cross-border RMB Cash Pooling* Entities in PFTZ can use the cash flow generated from business operation activities and industrial activities to carry out RMB cash pooling for the onshore and offshore members in the same group. Centralized RMB Collection/Payment under Current Account* Entities in the PFTZ can be used as netting center, acting on behalf of its overseas affiliates for centralized collection and payment. It applies to the internal deal for onshore associated entities and the netting settlement with offshore affiliates * According to the notice issued by PBOC on 11 th June, two-way cross-border RMB cash pooling and centralized RMB collection/payment under Current Account will be rolled out nationwide. 20
Potential Business in the PFTZ and Current Limitation According to the Opinions of People s Bank of China on Financial Supports To Build China (Shanghai) Free Trade Zone, below business may be released in the future The financial institutions and enterprises in FTZ can invest in SH security and future exchange. The overseas parent company of FTZ enterprise may issue RMB bonds in China in accordance with related Chinese laws and regulations. Eligible corporate can transact offshore derivatives and securities to hedge. No Cash Business For the prevention of hot money inflow, PBOC prohibits FTA from being used for cash business. No FCY Business At this stage, foreign currency cannot be deposited in FTA. PBOC and SAFE may consider permitting foreign currency business under FTA system six months later 21
Cross-border RMB Liberalization in Suzhou Industrial Park PBOC announced cross-border RMB initiative for Suzhou Industrial Park (SIP) to conduct cross-border RMB transactions with Singapore Banks in Singapore can conduct cross-border RMB lending to corporates in SIP; Corporate in SIP can issue RMB bonds in Singapore; Equity investment funds in SIP can conduct direct investment in corporates in Singapore Individuals in SIP can conduct RMB remittance between China and Singapore for the settlement of current account transactions and direct investment in corporate in Singapore. 22
Offshore RMB Market Presents a Wide Range of Applications Highest spread in 04/2011: 3.35% Funding Offshore RMB provides an alternative source of funding to onshore RMB Pool of offshore RMB funding is increasing Lower cost of borrowing for offshore RMB see below for comparison between onshore and offshore benchmark New SAFE regulation (effective 1 Jun) facilitates cross border financing structures Onshore vs offshore RMB cost of borrowing (2011 to 2014) Lowest spread in 07/2013: -0.59% 5.01% Arbitrage Price differentials across the onshore and offshore markets offer opportunities for clients and banks A number of successful strategies has been well received, e.g. DF/NDF, offshore RMB or USD bond issuance hedged with CCS Onshore RMB Offshore RMB Deposit rate (1 yr) 3.30% 2.88% Lending rate (1 yr) 5.00% 3.08% Forward rate (1yr) +760 +940 Bond yield (benchmark) 5.19% 3.97% Current spread: 1.13% 3.88% Source: Bloomberg (DBCNHAY vs CUCB3) as of 18 June 2014 1. Onshore (yellow line)- DB CNH Average Yield 2. Offshore (shaded area) - Inter-Bank Fixed-Rate CorpoRate Bond (AAA) 3Year Index 23
Offshore RMB Provides Additional Hedging and Investment Options Hedging Investment Broad range of tools available Multiple markets: onshore RMB, offshore RMB, RMB NDF Offshore market is deepening and range of hedging product is broadening Hedges available for FX and Interest rate risks Increasing pool of RMB investment vehicles Range of RMB investment products includes structured investment deposits, dim sum bonds, bond funds, currency-linked investment, various insurance products and equity-linked investment (e.g. 滬港通 to be launched in Oct) More diversification opportunities Transaction volume of Interbank CNH FX Spot and Swap (Transaction / day) 12,000 10,000 8,000 6,000 4,000 2,000 0 350 500 1,750 1,000 1,750 5,500 2,750 9,000 6,000 11,000 2010 2011 2012 2013 2014 RMB Deposits (billion yuan) Major Offshore Center RMB deposits Clearing Bank BOC HK Hong Kong Singapore Taiwan London 960 200 290 14.5 ICBC Singapore branch BOC Taipei branch CCB London spot swap (Source: DBS Estimate 2014 As of May 2014) Source: HKMA, MAS, Reuters, CBC, City of London Corporation 24
Offshore RMB Bond Market Update in 2014 RMB internationalization continued to grow on the back of strong policy support by the government and the creation of additional offshore RMB clearing arrangements (i.e., Singapore and Taiwan) and currency swap lines (with overseas central banks). The lack of offshore RMB investment options has continued to drive the huge demand for RMB bonds. For 2014 YTD, total offshore RMB bond issuances have already reached RMB276 billion, compared with RMB280 billion for the total amount of issuances for 2013. Looking forward into 2H2014 and beyond, offshore RMB issuance is likely to remain buoyant In addition to increased issuance volume, more international issuers have tapped the CNH market in addition to Greater China issuers. In terms of issuance structures, in addition to the traditional keepwell agreement or guarantee structure, there are more deals in the market with credit enhancement with SBLC, EIPU. Most recently there was the first secured CNH bond issuance by share pledge in the market. New regulations, such as favourable policies in free trade zones, continue broadened the repatriation channels, encouraging more companies to tap the CNH bond market RMB billion Offshore RMB Bond Issuance (including CD issuance) Source: Bloomberg, DBS * As at 26 June 2014 25