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TRANSCRIPT
Offshore RMB
Express Issue 43‧
September 2017
Contents
Part 3
Part 4
Part 1
Special Topics
Chart Book
Market Review
Part 2 Policy and Peers Updates 4
5
1
Editors:
Annie Cheung
Tel :+852 2826 6192
Email : [email protected]
Kera Kong
Tel:+852 2826 6205
Email: [email protected]
Sharon Tsang
Tel :+852 2826 6763
Email: [email protected]
15
Market Review
Offshore RMB Express 1
1. Offshore RMB exchange rate
strengthened
In August, supported by a number of
favorable factors at home and abroad, the
exchange rate of RMB against the US dollar
headed higher. On August 31, the central
parity rate of RMB against the US dollar rose
to 6.60, a 14-month high, up by 1.9% MoM
and 4.8% YTD. On August 31, CNH
appreciated against USD by 1.9% MoM and
closed at 6.596, the highest level since June
last year. Meanwhile, CNY appreciated
against USD by 1.9% MoM and closed at
6.5963. The average spread of the month
between CNH and CNY almost disappeared.
For the HIBOR fixing, CNH HIBOR fixing
rates were relatively stable in August. On
August 31, the O/N, 1-week and 3-month
CNH HIBOR rates were 1.86%, 2.57% and
3.97%, respectively. The market
expectations of the RMB exchange rate have
been reversed, and it will remain strong in
the short term.
2. Major RMB business indicators
improved
RMB deposits in Hong Kong increased
for a second month by 1.6% MoM to RMB
534.7 billion in July 2017. The amount of
RMB cross-border trade settlement
decreased by 11.5% MoM to RMB 329.6
billion in July, down by 19.1% YoY. In
Taiwan’s offshore market, as of the end of
July 2017, total RMB deposits rebounded for
3 consecutive months, up by 0.1% or RMB
0.2 billion from the previous month to RMB
309.4 billion.
.
Offshore RMB businesses stabilized in August. The exchange rate of onshore and offshore
RMB against US dollar (CNY and CNH) both headed higher to over 6.60. The improvement in
major RMB business indicators reflects increasing international use of the RMB and the
recovery in market confidence.
.
Offshore RMB Market Continues
to Improve
Market Review
Offshore RMB Express 2
3. The international use of RMB
increased
SWIFT data show that in July 2017, the
RMB regained its position as the fifth most
active currency for global payments with a
share of 2.00%, an increase from 1.98% in
June 2017. Overall RMB payments value
decreased by 3.71% compared to June 2017,
whilst in general all payments currencies
decreased by 4.34%. RMB RTGS turnover
was RMB 20.19 trillion in August 2017 for a
MoM decrease of 0.6%. In the first eight
months of this year, RTGS turnover
increased by 6.2% YoY to RMB 142.34
trillion.
4. RMB bond held by foreign
institutions continued to rise
According to the latest date released by
the China Central Depository & Clearing Co.
Ltd and Shanghai Clearing House, as of the
end of July, the custody amount of foreign
institutions in China's interbank bond market
was RMB 841.5 billion, which increased by
RMB 39.9 billion in one month to the highest
level since June 2016. In July, foreign
institutions increased their holdings of
treasury bonds by RMB 37.8 billion, rising for
five consecutive months. Thanks to favorable
factors including the slowdown in capital
outflow, solid economic growth, improving
outlook for RMB internationalization, etc, the
size of China treasury bonds held by foreign
institutions continued to increase. The Bond
Connect ran smoothly in the first month of
operation. Market participants were
optimistic about the investment value of the
Bond Connect in the long run. Moreover,
they look forward to the improvement in
taxation regime, rating and trading varieties
in the future. As the RMB exchange rate
stabilized, total return of the Chinese bond
market is higher than that of most developed
countries. Given the convenience of Bond
Connect, it will attract more and more
overseas funds to China’s bond market.
Market Review
Offshore RMB Express 3
5. The domestic capital market is
opening up
According to statistics from the State
Administration of Foreign Exchange (SAFE),
the approved quota for RQFII totaled RMB
584.9 billion as of August 30, up by RMB
36.6 billion compared with a month ago, with
a total of 188 qualified foreign institutional
investors having been approved. At the same
time, the approved quota for QFII totaled
RMB 94 billion as of August 30, up by RMB
0.7 billion compared with a month ago, with a
total of 286 qualified foreign institutional
investors having been approved. In addition,
the approved quota for QDII totaled RMB 90
billion as of August 30, with a total of 132
qualified foreign institutional investors having
been approved. No new quotas were
approved in the past 21 months.
Policy and Peers Updates
Offshore RMB Express 4
“SAFE required advancement of reporting on
overseas spending
The State Administration of Foreign Exchange (SAFE) announced in June that
effective from September 1, domestic financial institutions would be required to report on
a daily basis all cash withdrawals via overseas ATMs and spending of more than RMB
1,000. However, the implementation was brought forward on August 21. According to the
SAFE, the measure aims at enhancing management in order to combat illegal
transactions overseas. It neither affects personal usage of debt card, nor relevant to the
foreign exchange market trend at present.
Some comments argue that the new rule aims at monitoring spending pattern,
preventing assets transfer overseas. Nevertheless, some of the associated third party
payments, such as Alipay and WeChat Pay, are excluded from data collection sample,
making it as the loophole of this new rule.
PBOC constrained newly issued interbank NCD with tenor of less than 1
year
On August 31, the People’s Bank of China (PBOC) announced to revamp the
existing rule on managing interbank negotiable certificate of deposit (NCD). Before the
new arrangement, the tenors of interbank NCD included within 1 year, 1 year, 2 years
and 3 years. Under the new rule, financial institutions are prohibited to issue interbank
NCD with maturity exceeding 1 year starting from September 1. However, the issued
NCD with tenor of more than 1 year can be rolled over until maturity.
RMB and MNT interbank regional trading was officially launched
The China Foreign Exchange Trading Center officially kicked off RMB and MNT
interbank regional trading on August 11. On the first trading day, transaction amount
reached MNT 620 million (equivalent to RMB 1.68 million). Bank of China, Industrial and
Commercial Bank of China, Agricultural Bank of China, China Construction Bank, Bao
Shang Bank and Bank of Inner Mongolia were first batch of participating banks and price
quoting banks for the transactions.
Special Topics
Offshore RMB Express
In order to cope with the depreciation cycle of the RMB and prevent systematic risks
that may be triggered by the outflow of funds, exchange rate stability measures have
become the focus of recent policies, which is reflected in the management of foreign
currency demand in the onshore market, and also stricter controls on RMB cross-border
capital flows, constraining the liquidity pool, increasing funding costs, and reducing
offshore RMB bond issuance. Meanwhile, the RMB’s inclusion in the SDR basket
presents a precious opportunity for RMB internationalization.
Michael DAI, Senior Economist
Offshore Market’s Functions in RMB
Internationalization
5
In order to balance between exchange
rate stability and RMB internationalization,
China has stepped up efforts to accelerate
the opening-up of its markets. After the
launch of Shanghai-Hong Kong Stock
Connect, China has introduced Shenzhen-
Hong Kong Stock Connect and Bond
Connect, opened up Chinese bond and
foreign exchange markets to foreign
institutional investors including central banks
and sovereign wealth funds, and expanded
the RQFII quota. These measures attract
foreign securities investment funds to offset
the pressure of capital outflows so as to
achieve the goal of stabilizing the exchange
rate. On the other hand, opening up the
onshore capital markets can contribute to
RMB internationalization. However, the
question is whether RMB internationalization
needs the support of the offshore market?
This can be explored from the main
indicators of RMB internationalization and
the experience of other major international
currencies.
1. RMB reserve asset investment
The RMB officially joined the SDR in
October 2016. The IMF has separately
identified holdings in the RMB in the COFER
statistics since the end of 2016. The ECB
also announced that it had invested its
foreign exchange reserves in RMB assets.
The RMB’s proportion in the currency
composition of official foreign exchange
reserves is an important indicator of RMB
Special Topics
Offshore RMB Express 6
internationalization. According to COFER,
foreign exchange reserves in the RMB
reached USD 88.54 billion as of the first
quarter of this year, accounting for 1.0% of
the USD 8848.95 billion in allocated reserves,
or less than 1.0% of the total of USD 10.9
trillion in all official foreign exchange
reserves. The RMB is the only emerging
market currency that has become an
international reserve currency. Foreign
central banks have diversified their foreign
exchange reserves into the RMB. Most of the
RMB assets are likely held in the most
secure RMB treasury bonds and policy bank
bonds. Both are mainly traded in the onshore
market, with the latest outstanding balances
at RMB 25.3 trillion and RMB 12.7 trillion,
respectively.
Hong Kong is the world's largest RMB
offshore market, and the Ministry of Finance
of PRC has been issuing bonds in Hong
Kong consistently. However, Hong Kong’s
market size is far smaller than that of the
Mainland, the world’s third largest bond
market. The latest outstanding balance of all
RMB bonds is only approximately RMB 200
billion in Hong Kong. Therefore, the onshore
market is the best choice for foreign
exchange reserve investment. The offshore
market can only play a limited supporting role
so far. To reflect the size of China’s economy
and bond market, 4.6% of global official
foreign exchange reserves need to be in
RMB assets, and the amount should be more
than USD 403 billion.
2. RMB foreign exchange
transactions
In this area, the offshore market will play
a leading role in the foreseeable future.
According to the BIS’s triennial global foreign
exchange transaction market survey, as of
April 2016, despite the depreciation of the
RMB for three consecutive years, on a net-
net basis, the RMB’s daily foreign exchange
transaction volume grew by 69.0% from 2013
to USD 202.1 billion. The RMB also rose to
become the world’s eighth most actively
traded currency. However, onshore RMB
foreign exchange transactions only accounts
for 21.7% of the total on a net-gross basis,
slightly down by 1.0% from 2013. In other
words, more than three quarters of RMB
foreign exchange transactions took place in
the offshore market. By transaction volume,
the world’s top five major RMB foreign
exchange markets are Hong Kong, Mainland
China, Singapore, the United Kingdom and
the United States.
Special Topics
Offshore RMB Express 7
This pattern is partly due to China’s
exchange rate stability measures and strong
real demand for foreign currencies, while
offshore market transactions accommodate
real demand, investment and speculation
purposes. Other major international
currencies share the same pattern. The
United Kingdom is the largest foreign
exchange market of major reserve
currencies such as the dollar, the euro, and
the yen, and its trading volume can even be
multiple times of the onshore market. The
foreign exchange transaction volume in the
offshore market accounts for about 80% of
the three major international reserve
currencies. Therefore, the offshore market is
very important in foreign exchange
transaction. If the RMB is to become the
world’s third largest foreign exchange
currency, its share in foreign exchange
transactions must rise from 4.0/200 to
21.6/200, with more than USD 1.1 trillion in
average daily trading volume.
3. RMB cross-border payment
Regarding RMB cross-border payment,
the larger the payment size of the currency,
the higher its international status. Cross-
border payment could involve one onshore
and one offshore party or two offshore
parties. According to SWIFT, RMB was the
world’s sixth largest international payment
currency, accounting for 1.98% as of June,
still lower than the same period in 2015 when
it was ranked fifth with a share of 2.09%.
While using phrases such as "lost
momentum" and "slowdown", the report also
lists five elements as the long-term driver of
RMB internationalization, namely, the Belt
and Road Initiative, CIPS, Hong Kong
“Super-connector” (Hong Kong accounts for
more than 75% of the RMB international
payments market), the mainland capital
market’s opening-up and FinTech. In this
area, the offshore market is essential. If the
RMB is to become the world’s third largest
payment currency, its share of cross-border
payment must increase from the current
1.98% to more than 8.0%.
4. RMB international bonds
According to BIS’s narrow definition,
RMB international bonds refer to RMB bonds
issued by foreign institutions in onshore or
offshore markets. This area is still a weak
point for the RMB because according to BIS
statistics, the outstanding balance of RMB
international bonds at the end of 2016 was
USD 110.6 billion, accounting for only 0.8%
of the global international bond market (US
dollar and euro international bonds
accounted for 63.0% and 22.0%, respectively,
and 85% combined).
Special Topics
Offshore RMB Express 8
In the onshore market, the issuance of panda
bonds surged to a new high of RMB 129 billion
last year, but in the offshore market, the
issuance of dim sum bonds and lion city bonds
declined. In comparison, the US dollar and euro
international bond markets are equivalent to
20.0%-25.0% of the overall US dollar and euro
bond markets.
For the yen, the international bond market is
only equivalent to 2.6% of the global
international bond market and 3.0% of the
overall yen bond market, compromising the
yen’s international currency status. Therefore, in
this area, RMB internationalization can be much
more effective with the support of the offshore
market. If RMB international bond market is to
become the world’s third largest, RMB
international bonds should amount to no less
than USD 350 billion, with a share of more than
2.6%.
5. RMB international deposits and loans
At present, in Hong Kong, the world's
largest offshore RMB center, RMB deposit and
loan balances were RMB 546.7 billion and RMB
294.8 billion respectively (as of the end of 2016).
It is small when compared to the onshore
market, where RMB deposit and loan sizes were
RMB 151.1 trillion and RMB 106.3 trillion,
respectively, or USD 6957 billion in international
deposits and USD 6798 billion in international
loans according to BIS for the same period.
Similar to the international bond market, the
international deposit and loan markets are
dominated by the US dollar and the euro (with a
combined 80.0% of deposits and 80.4% of
loans), while the yen, as the third largest
currency, only accounted for 3.4% and 3.6% in
the international deposit and loan markets
respectively. Therefore, if the RMB is to become
the world’s third largest currency in international
deposits and loans, RMB deposits and loans will
only need to increase to USD 234 billion and
USD 246 billion, respectively. The offshore
deposit market had such potential before the
recent correction. Although the onshore market
is the largest in the world, this area largely
hinges on the developments of the offshore
market.
In conclusion, the developments of offshore
markets play a very critical role in many aspects
and are indispensable to further RMB
internationalization. It should be noted that the
developments of offshore markets are a new
variable and could have ramifications on
monetary policy, exchange rates, interest rates,
and even financial risks in the onshore market,
when cross-border capital flows are not yet free.
Once the Chinese economy, financial system
and regulation are able to cope with these
effects, the RMB internationalization will become
successful.
Special Topics
Offshore RMB Express 9
1. Qualified Chinese enterprises have
been encouraged by policies to issue
bonds overseas
The Mainland’s foreign exchange reserves
had shrunk at fast pace, as RMB
depreciation expectation accelerated
following the 8.11 exchange rate reform in
2015. As a result, the Mainland strengthened
capital controls since the second half of 2016
and attracted foreign capital through a
“controlling outflow amid expanding inflow”
approach. In September 2015, the Mainland
streamlined the procedure for issuing bonds
overseas. Subsequently, the People’s Bank
of China (PBOC) unified the management of
local currency debts and foreign currency
debts for domestic enterprises in May 2016.
In June 2016, the State Administration of
Foreign Exchange also relaxed foreign
exchange settlement for foreign debts on a
How Long Will Chinese Enterprises
Remain Enthusiastic about Issuing
Bonds Overseas?
Kam LIU, Analyst
Overseas bond issuance by Chinese enterprises picked up in the first half of this year.
The number of issuance reached 1,099, which surged by almost 10 times from the same
period in 2016. Meanwhile, the funds raised increased by almost 3 times to USD 148.3
billion. In general, substantial increase of overseas financing by Chinese enterprises was
mainly attributable to tightening credit conditions in the domestic market, relatively low
financing cost overseas and declining exchange rate risk. Nevertheless, overseas bond
issuance by Chinese enterprises will likely cool down in the second half of the year, due to
the easing of new regulatory measures, the resumption of financing function of the bond
market in the Mainland, as well as the dollar rebound from an oversold position. For the
entire year, Chinese enterprises will be more enthusiastic about issuing bonds overseas,
and the issuance will set a new record.
Special Topics
Offshore RMB Express 10
voluntary basis. The Mainland relaxed cross-
border funding policies in the recent years,
facilitating qualified Chinese enterprises to
issue bonds overseas and the usage of funds.
In the first half of 2017, the Mainland banks
aggregately issued USD 76.8 billion worth of
bonds, up 569% from a year ago.
2. Tightening credit conditions
affected the direct financing function
of the bond market in the Mainland
In the first half of this year, the Mainland
promoted financial deleveraging by a
combination of “tight monetary conditions”
and “robust supervision”. Therefore,
financing cost climbed considerably,
constraining the financing function of the
bond market. In the first half of this year, net
credit financing registered a decline of RMB
387.361 billion, or down 120% YoY, which
was the first decline in recent years. Since
September 2016, regulatory authorities in the
Mainland have released policy documents on
controlling domestic financing for property
developers. In order to mitigate funding
pressure, property developers raised funds
overseas instead. In the first half of 2017,
dollar bond issuance by property developers
amounted to USD 24.4 billion, which was
75% higher than the issuance amount in
2016.
Special Topics
Offshore RMB Express 11
3. Overseas financing cost has a
competitive edge due to wide interest
rate spread between China and the
US
While the Federal Reserve raised
interest rate in March and June, the US
economy underperforms market expectation.
The US economy grew 2.1% in the first half
of this year, compared with a growth rate of
3% that President Trump promised. The 10-
year treasury yield dropped to around 2.2%
as the effect of “Trump Trade” subsided. In
contrast, China’s economic growth rates for
Q1 and Q2 of this year were better than
expected. When the Federal Reserve raised
interest rates this year, the PBOC moved in
tandem. “In reality, the rise of domestic
market interest rates in the recent half year
preceded the Federal Reserve’s rate hikes”,
said a PBOC official. In the first half of this
year, bonds issued by many Chinese
enterprises overseas were priced between
3% and 4 %; whereas the yield of a domestic
AAA corporate bond was 6.14% in May.
In light of the wide interest rate spread
between China and the US, Chinese
enterprises could benefit from relatively low
financing costs when they issued bonds
overseas.
4. Declining exchange rate risk for
Chinese enterprises issuing bonds
overseas as the dollar weakened
The dollar has depreciated 11% year to
date, given the factors of subdued inflation,
policy implementation setbacks for the
Trump administration, robust recovery of the
Eurozone economy, etc. The market
believed that the European Central Bank
(ECB) will gradually exit from quantitative
easing, as the ECB President Draghi said
that “the Governing Council will likely discuss
changing the monetary stance in autumn”.
Against this backdrop, the euro will likely
remain strong while the dollar will stay weak.
At present, the rebound of the RMB is driven
by the weak dollar. At the same time, capital
control is still relatively tight in the Mainland.
The inclusion of counter-cyclical factor in the
RMB central parity fixing also helps revert
the trading pattern during pro-cyclical periods.
Therefore, substantial depreciation of the
RMB will be unlikely this year. For Chinese
enterprises issuing bonds overseas,
exchange rate risk has declined.
Special Topics
Offshore RMB Express 13
5. Overseas financing by Chinese
enterprises may decrease in the
second half of the year
Due to the abovementioned factors,
overseas bond issuance by Chinese
enterprises picked up in the first half of the
year. However, overseas financing by
Chinese enterprises will likely decline in the
second half of the year, following the
changes in monetary stances and liquidity
conditions in the Mainland.
Firstly, the pace of new regulatory
measures in the Mainland may slow down
with co-ordination among regulatory
authorities. Although robust supervision will
still be in place this year, the pace of
launching new measures may slow. First of
all, M2 has registered single-digit growth for
3 months in a row, reflecting progress in
financial deleveraging in the Mainland.
Meanwhile, financial services’ role in
supporting the economy has been
emphasized in the fifth National Financial
Work Conference, which implied that
financial deleveraging would progressively
carry out amid stability. Last but not least,
under the co-ordination by the cabinet
Committee on Financial Stability and
Development, a newly announced committee
under the State Council, different regulatory
measures will be launched progressively. As
a result, the impacts on the bond market
should be marginal.
Secondly, the PBOC clearly intends
to stabilize liquidity conditions in the
Mainland. Regarding open market
operations in July (based on full-scale
statistics and including Medium-term Lending
Facility), the PBOC injected liquidity for 3
successive weeks with weekly amount of
RMB 510 billion, RMB 110.5 billion and RMB
141.5 billion, respectively. Such pattern
largely reflects the mindset of “adjusting
open market operations based on liquidity
conditions” mentioned by the PBOC. The
PBOC still strongly emphasizes stabilizing
liquidity conditions, and hence the monetary
stance will remain prudent in the second half
of the year.
Thirdly, direct financing function of
the bond market may gradually resume. In
the first half of this year, off-balance sheet
business shrank considerably as financial
deleveraging was taking place. Instead,
social financing mainly switched to bank
credit financing. Many banks had already
utilized 70% of their annual credit quota in
the first six months. As such, social financing
may increasingly rely on debt financing in the
second half of the year, and the direct
financing function of the bond market may
gradually resume.
Special Topics
Offshore RMB Express 14
Fourthly, the end of the strong dollar
cycle has yet to come. The dollar
depreciated for 5 straight months as of
August 1, the longest period of depreciation
since 2011. With multiple factors such as
declining impact of the Federal Reserve’s
tapering, Trump’s policy setbacks, stronger
recovery of the Eurozone’s economy and
narrowing divergence of global monetary
policy stances, the dollar has depreciated
sharply for a long period of time. However, it
is premature to argue that strong Dollar cycle
has come to the end at this moment.
For one, the end of strong dollar cycles
in the past was mainly driven by economic
recessions in the US. However, the US
economy is gradually recovering for the time
being, which is completely different from the
weak dollar cycles in the past.
For another, the Federal Reserve is
carrying out normalization of monetary policy,
with a series of rate hikes and prospective
balance sheet reduction. The deprecation of
the dollar at present may be an overreaction
to the reverse of “Trump Trade” and marginal
monetary policy tightening by the ECB. For
the time being, inflation in the Eurozone is
still far from the central bank’s target.
Moreover, unemployment rate is relatively
high and economic performance among
member states differ. Therefore, the ECB’s
exit from quantitative easing or the potential
pace of it remains uncertain. To conclude,
while the dollar may remain relatively weak
in the second half of the year, room for
further deprecation is limited.
Chart Book
Offshore RMB Express
Market Indicators
15
Hong Kong RMB Deposits (in RMB bn) RMB Cross-border Trade Settlement (RMB bn)
USD-CNH and USD-CNY Exchange Rates
Source: HKMA Source: HKMA
Source: Bloomberg
0
200
400
600
800
1000
1200
01/10 01/11 01/12 01/13 01/14 01/15 01/16 01/17
July: 534.7bn
0
100
200
300
400
500
600
700
800
01/11 01/12 01/13 01/14 01/15 01/16 01/17
July: 329.6bn
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
7
07/15 09/15 11/15 01/16 03/16 05/16 07/16 09/16 11/16 01/17 03/17 05/17 07/17
USD-CNH USD-CNY
End of Aug: USD-CNH 6.596
USD-CNY 6.5963
Chart Book
Offshore RMB Express 16
CNH HIBOR Fixing (%) Hong Kong Offshore RMB Bond Issuance (RMB bn)
CNH & CNY China Sovereign Curve (%, 31 Aug 2017)
FTSE-BOCHK Offshore RMB Bond Composite Index
Source: Bloomberg
Source: Bloomberg Source: Bloomberg
Source: BOCHK Global Market estimate
End of Aug: 124.09
End of Aug: Overnight 1.8573% 1-week 2.5673% 3-month 3.9677%
Chart Book
Offshore RMB Express 17
RMB Clearing Transaction Value (RMB tn)
SWIFT World payments currency ranking & market share
Source: HKICL
Source: SWIFT
December 2015 July 2017
43.89% USD #1
EUR 29.39% #2
GBP 8.43% #3
JPY 2.78% #4
2.00% CNY
EUR 33.34% #2
GBP 7.31% #3
JPY 3.15% #4
#5 2.31% #5 CNY
CAD #6 1.70%
USD #1 39.83%
1.82% #6
AUD #7 1.62%
CHF #8 1.57%
CAD
August: 20.19tn
Disclaimer: This report is for reference and information purposes only. It does not
reflect the views of Bank of China (Hong Kong) or constitute any investment advice.
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