RMB: A New Trade and Settlement Currency

IMAGE AREA IMAGERY MAY BE INSERTED HERE (must be from approved source eg istock, Shutterstock or approved HSBC imagery) OR GREY AREA DELETED AND LEFT BLANK WHITE RMB: A New Trade and Settlement Currency Indonesia Investment Forum 2014 Date: 26 November 2014 Prepared by: Kathy Chan, Director RMB Business Development, Global Markets, HSBC 1

RMB Internationalisation: A three-stage process Significant progress in a short time A Top Global Trading Currency A Top Global Investment Currency 1 2 3 A Top Global Reserve Currency Further current account liberalisation Opening up onshore markets Growing interest in RMB RMB trade settlement Approximately 26% of China s total trade settled in RMB in YTD 2014, up from 18% for FY 2013; Further liberalisation of RMB cross-border current account activities Vibrant CNH 1 markets: FX/FXO, Dim Sum Bond, CCS, CNH IRS, ETFs Increasing onshore access SHSC; CIBM; QFII; RQFII has been expanded to include Taiwan, London, Singapore and Paris, etc Existing bilateral swap agreements in 26 countries and regions, totaling over RMB2trn RMB is already held as a reserve currency by some central banks through offshore CNH market, CIBM and QFII schemes FX market turnover by currency 2,3,4 USD EUR JPY 23.0 19.0 33.4 39.1 87.0 84.9 0 10 20 30 40 50 60 70 80 90 100 GBP 11.8 12.9 AUD 8.6 7.6 5.2 CHF 6.3 CAD 4.6 5.3 MXN 1.3 2.5 CNY 2.2 0.9 NZD 2.0 1.6 1.8 SEK 2.2 RUB 1.6 0.9 1.4 HKD 2.4 SGD 1.4 1.4 TRY 1.3 0.7 0 3 6 9 12 15 Notes: 2013 2010 1. CNH is the name used in the market to refer to offshore deliverable RMB 2. Adjusted for local and cross-border inter-dealer double-counting, ie net-net basis 3. As two currencies are involved in each transaction, the sum of shares in individual currencies will total 200%. The share of currencies other than the ones listed is 12.2% for 2013 and 13.7% for 2010. 2 Daily Average Turnover (USDbn) 4,700 4,200 3,700 3,200 2,700 2,200 1,700 1,200 700 200-300 +38% +15% +63% +23% RMB turnover triples versus 2010, now in top-10 currencies USD EUR YEN GBP AUD CHF CAD MXN CNY 4. Turnover for 2010 may be underestimated owing to incomplete reporting of offshore trading. Methodological changes in the 2013 survey ensured a more complete coverage of the indicated currencies Source: BIS Triennial Central Bank Survey +235% increase in 2013

Key Developments Rapid expansion of RMB use outside China RMB is now 2nd in trade finance1, 7th in global payments1 and 9th most traded2 160 countries doing RMB business in a typical month1 RMB bn Customer Deposits3 Hong Kong 944.5 Taiwan 300.5 Singapore 254 Macao 129 Korea 133 Luxembourg 21 Paris 20 Frankfurt 21 London 5.4 28 territories with existing swap agreements 10 offshore RMB centres Iceland Canada Toronto Brazil Russia Luxemburg Paris ECB United Kingdom Hungary London Mongolia Frankfurt Ukraine Switzerland Albania Turkey Qatar South Korea Doha Pakistan Taiwan UAE Thailand Hong Kong Sri Lanka Hong Kong Malaysia Singapore Indonesia Singapore Australia Argentina Territories with existing swap agreements New Zealand Offshore RMB centre Growing offshore liquidity pool Liquid Currency swaps in 28 territories worth over RMB3.1tn to provide backstop liquidity Fungible Free transfer between offshore accounts4 The offshore liquidity pools are fully fungible Transferable Deposits can flow freely between the different centres Increasingly used in crossborder transactions with China Notes: 1 Source: SWIFT 2 Source: 2013 BIS Triennial Survey 3 Source: PBoC, HKMA, MAS, Central Bank of the Republic of China (Taiwan), City of London, CEIC, BIS, WFE, BOK, Budesbank, HSBC. Note: RMB deposits in Taiwan and Korea in Oct 2014, Hong Kong in Sep 2014, Singapore Luxembourg and Macau in Jun 2014, Paris in Sep 2013 and London in Dec 2013. 3 4 Subject to local rules and regulations

Indonesia s Strong Ties with China Customer benefits of RMB cross border trade settlement Strong Trade Flow between China and Indonesia Customer Considerations Source: CEIC, HSBC Customer benefits of RMB cross border trade settlement Indonesia Exporter Improve buyer relationship Access to an importer base which might otherwise have limited access to FX Help Chinese importers improve their working capital Indonesia exporters can hedge the FX exposure in the offshore RMB market and invest surplus liquidity in a wide range of investment products offshore Indonesia Importer Improve supplier relationship by paying in their home currency HSBC s 2013 International RMB survey found 53% of Chinese businesses would offer discounts of up to 5% for transactions settled in RMB Indonesia importers can buy RMB at a discount in the forward market, a benefit not secured by companies who still purchase goods in USD 3. Where can I invest surplus cash? RMB 2. What type of financing are available? 1. How can I manage the FX risk? 4

FX spot RMB internationalisation will accelerate in 2014 Year-end 2014 forecast: 6.14 The RMB's outlook has softened following the FX policy-induced weakness of recent months The overriding focus for FX policy will be to continue to induce more volatility into the onshore exchange rate, which should help discourage hot money inflows Once the PBoC is more comfortable with the nature of inflows, we think the RMB could resume appreciating in H2, albeit in a more volatile manner 6.9 6.8 6.7 6.6 6.5 6.4 6.3 6.2 6.1 CNH 2012 2014 Estimated Spot Daily Turnover USD1bn USD10.7bn Standard spot ticket USD5 10m USD10m Mid Oct 2010: CNH was traded at a premium as much as 3% at one point due to speculation of RMB revaluation 22 Sep 2011: CNH was traded at a discount as much as 2.5% due to USDCNH short-covering on risk aversion 14 Apr 2012: PBoC widened the daily trading band of USDCNY to +/-1% from +/-0.5% 17 Mar 2014: PBoC widened the daily trading band of USDCNY to +/-2% from +/-1% 6 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 CNH CNY CNY fix May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Source: HSBC Source: HSBC, Reuters 5

RMB Hedging Summary of Hedging Instruments Description Key Customer Benefits Potential Customers Forward A forward contract that locks in the price at which a client can buy or sell CNH on a future date Simple and straightforward hedging Importers dealing with Chinese suppliers Corporates with forward cash flow in RMB Par Forward A series of forwards where the forward rates have been blended into a single rate (Par Forward rate) A defensive strategy for client that wishes to lockin their cash flow requirements Corporates with regular RMB requirements Structured Forward Structured forwards are synthetic forwards that use currency options to replicate a forward hedge position A flexible FX hedging mechanism that can be tailored to client requirement and objectives Corporates with RMB requirements Cross Currency Swap Client swaps interest payments and loan principal denominated in two different currencies Both FX and interest rate exposures are hedged Corporates with RMB surplus liquidity in mainland 6

Case Studies IMAGE AREA IMAGERY MAY BE INSERTED HERE (must be from approved source eg istock, Shutterstock or approved HSBC imagery) OR GREY AREA DELETED AND LEFT BLANK WHITE 7

RMB Hedging Forward Client s Exposure / View Deliverable CNH Forward Client needs to sell USD and buy CNH on a forward date. Client takes a view that USDCNH spot rate at the forward date will be below the Forward rate This strategy allows the client to sell USD/buy CNH at a forward rate above spot rate 6.38 6.36 6.34 6.32 6.30 6.28 6.26 6.24 6.22 6.20 6.18 6.16 6.14 6.12 6.10 6.08 6.06 6.04 6.02 6.00 1-Jan-14 21-Jan-14 10-Feb-14 2-Mar-14 22-Mar-14 11-Apr-14 1-May-14 21-May-14 10-Jun-14 30-Jun-14 20-Jul-14 9-Aug-14 29-Aug-14 18-Sep-14 8-Oct-14 28-Oct-14 17-Nov-14 SPOT 12M Source: Reuters 8

Case study: Abu Dhabi based company FOR ILLUSTRATIVE PURPOSE ONLY Client profile An Abu Dhabi based company specializes in the manufacturing of precast and concrete components imported from China. The company asks the onshore supplier to quote a price in CNY and in USD. UAE importer buying goods using USD UAE importer buying goods using RMB Chinese supplier quotes USD 435,000 RMB 2,677,500 USD/CNY Spot 6.13 RMB 2,666,550 RMB 2,677,500 / 6.13 = USD 436,786 Final contract with Chinese supplier 0.4% saving vs RMB 2,677,500 RMB 2,666,550 3m USD/CNH deliverable forward 6.16 after hedge using forward: RMB 2,666,550 / 6.16 = USD 432,881 additional 0.49% saving vs USD 435,000 Through HSBC s global presence and team collaboration, we were able to help the UAE importer save roughly 0.4% (CNY2.666M instead of CNY2.677M). Additionally, by booking a 3m deliverable CNH forward against their CNY denominated trade facility, the importer was able to achieve an additional 0.49% in savings when compared to the USD/CNY spot rate. FX Risk OR UAE Importer Chinese Supplier 9

Case study: Singapore Corporate FOR ILLUSTRATIVE PURPOSE ONLY Client profile Singapore corporate Factory in China Client needs to sell EUR and buy deliverable RMB on a regular basis and would like to hedge its FX exposure due to RMB appreciation Client is prepared to accept uncertainty on the number of dates hedged to achieve a potentially better hedge rate Hedging strategy Multicallable forward on EURCNH Zero premium strategy Hedge rate better than forward Guaranteed hedge rate until Callable Start Date Uncertainty on total number of dates hedged Protection at 8.18 Market Reference information Spot EURCNH 7.975 1 year forward EURCNH 8.09 10

Case study: Dim sum Bond Hedge Issuer sells 1) underlying CNH Dimsum bond, 2) enter into USDCNH CCS Example FOR ILLUSTRATIVE PURPOSE ONLY Fluctuating CCS means issuers must be nimble and opportunistic Corporate customers have been pioneers of the USDCNH CCS market International dim sum issuers swap CNH proceeds back to USD and switch liabilities into USD Potential issuer rating BBB/BB, 3Y at 4% / 6% or on after swap basis 3m$L + 120 / 319bp (market reference 3Y USDCNH CCS at 2.81%) Dim Sum Bond USDCNH CCS + (Pay USD float, receive CNH fixed) = Synthetic USD Loan Source: Bloomberg USDCNH CCS Market Depth and Dynamics Chinese banks and major international banks are active players in the CCS market, although commercial banks are more active compared with investment banks mostly due to their balance sheet differences Strong growth since its inception in 2010 with daily turnover reaching USD350m Excellent depth exists in 2 year and below tenors and fundamental factors can be reflected; 3 year to 5 year tenors have good liquidity to accommodate issuance and liability hedge flows. Benefits International issuers often look at the absolute USD Libor spread after hedge in order to find the cheapest venue for funding 11

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Risk Disclosure Renminbi ( RMB ) is currently not freely convertible and RMB conversion through Hong Kong banks is subject to certain restrictions. The amount of offshore RMB (deliverable outside Mainland China, informally known as CNH ) may be limited, which may affect the liquidity of offshore RMB products. The market for offshore RMB is a different market to that of onshore RMB (deliverable in Mainland China, known as CNY ). Apart from its own supply and demand, the offshore RMB exchange rate may be influenced by the onshore exchange rate (which currently trades within a band set by authorities in the onshore interbank market) and the two rates may converge with or diverge from each other. 13