offshore rmb express - bank of china€¦ · the rmb has officially become an international...

Offshore RMB

Express Issue 44‧

October 2017

Contents

Part 3

Part 4

Part 1

Special Topics

Chart Book

Market Review

Part 2 Policy and Peers Updates 3

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. The flexibility of offshore RMB

exchange rate improved

A year after the RMB was included in

the SDR currency basket, the flexibility of the

RMB’s exchange rate has greatly improved,

and the exchange rate’s two-way fluctuation

has become more prominent. Since the

beginning of this year, the onshore RMB

exchange rate against the US dollar has

appreciated 4.33%, while it was relatively

stable against a basket of currencies. Since

September, the RMB’s exchange rate

against the US dollar has undergone a V-

shape trajectory, appreciating in early

September and retreating since mid-

September. On September 29, CNH

depreciated against USD by 1.02% MoM and

closed at 6.6634. Meanwhile, CNY

depreciated against USD by 0.57% MoM and

closed at 6.6339. The average spread of the

month between CNH and CNY almost

disappeared. As for HIBOR fixing, CNH

HIBOR fixing rates were relatively stable in

September. On September 29, the O/N, 1-

week and 3-month CNH HIBOR rates were

3.73%, 4.27% and 4.69%, respectively, up

from the previous month but remaining

largely stable.

2. Major RMB business indicators

improved

RMB deposits in Hong Kong decreased

by 0.37% MoM to RMB 532.8 billion in

August 2017. The total remittance of RMB for

cross-border trade settlement amounted to

RMB 336.0 billion in August, up by RMB 6.4

billion compared with RMB 329.6 billion in

July. In Taiwan’s offshore market, as of the

end of August 2017, total RMB deposits

rebounded for 4 consecutive months, up by

0.22% or RMB 0.7 billion from the previous

month to RMB 310 billion.

.

Offshore RMB businesses stabilized in September. The flexibility of the exchange rates of

onshore and offshore RMB against US dollar (CNY and CNH) both improved. Major RMB

business indicators remain stable, and the international reserve currency function of the RMB

has gradually strengthened. The RMB has officially become an international currency.

.

Offshore RMB Market Continues

to Improve

Market Review

Offshore RMB Express ２

3. International use of RMB increased

SWIFT data show that in August 2017,

the RMB maintained its position as the fifth

most active currency for global payments

with a share of 1.94%, a decrease of 0.06

percentage points from the previous month.

Hong Kong is still the largest offshore RMB

center, with RMB trading volume accounting

for 76.23% of the total offshore RMB

turnover, followed by the UK and Singapore,

accounting for 5.19% and 4.41% respectively.

RMB RTGS turnover was RMB 18.74 trillion

in September 2017 with a MoM decrease of

7.2%. In the first nine months of this year,

RTGS turnover increased by 5.0% YoY to

RMB 161.08 trillion.

4. The international reserve currency

function of RMB has gradually

strengthened

According to the COFER report from the

IMF recently released, as of the second

quarter of 2017, RMB reserves held by other

countries rose to USD 99.36 billion, up by

9.5% compared with the end of 2016 and

accounting for 1.07% of the total. On March

31, the COFER report listed the holdings of

RMB foreign exchange reserves for the first

time. Eight currencies are now separately

listed, namely, the US dollars, Euros, RMB,

Yen, Pound, Australian dollar, Canadian

dollar, and Swiss francs. All other currencies

are grouped under "other currencies".

5. The domestic capital market is

opening up further

According to statistics from the State

Administration of Foreign Exchange (SAFE),

the approved quota for RQFII totaled RMB

589.5 billion as of September 29, up by RMB

4.6 billion compared with a month ago, with a

total of 191 qualified foreign institutional

investors having been approved. At the same

time, the approved quota for QFII totaled

RMB 94.5 billion as of September 29, up by

RMB 0.5 billion compared with a month ago,

with a total of 287 qualified foreign

institutional investors having been approved.

In addition, the approved quota for QDII

totaled RMB 90 billion as of September 29,

with a total of 132 qualified foreign

institutional investors having been approved.

No new quotas were approved in the past 22

months.

Policy and Peers Updates


PBOC scrapped reserve requirement on

foreign exchange trading

The People’s Bank of China (PBOC) removed reserve requirement of 20% for

settling foreign exchange forward yuan positions with effect from September 11.

Meanwhile, the supervision on the reserves put aside by offshore financial institutions

was also loosened. According to Sun Guofeng, head of the PBOC financial research

institute, amendments on the aforementioned measures were needed as the current

market environment greatly changed. Some comments argue that the move would

significantly reduce the cost for RMB forward trading activities, mitigating appreciation

pressure on the RMB.

S&P cut sovereign credit ratings of China and Hong Kong, respectively

The Standard & Poor's rating agency cut China’s long-term sovereign credit ratings

by one notch to ‘A+’ from ‘AA-’ on September 21, saying its prolonged period of strong

credit growth has increased its economic and financial risks. S&P also expected China's

economic growth to remain strong at close to 5.8% or more annually through at least

2020. S&P has also slashed Hong Kong's top-notch credit rating to AA+ from the highest

AAA, citing Hong Kong had very strong institutional and political linkages with China and

warning of potential spillover risks the mainland's ballooning debt pile.

Commercial banks would be eligible for targeted RRR cut if supporting

small and micro companies

On September 28, the State Council of China announced that commercial banks will

be eligible for a lower reserve requirement ratio (RRR) or re-lending support if their total

or increase of loans granted to small and micro companies, agriculture businesses or

secured loans for startups reaches a certain threshold. However, each small and micro

company should have less than RMB 5 million in lines of credit.

Policy and Peers Updates


RMB and KHR interbank regional trading was officially launched

The China Foreign Exchange Trading Center officially kicked off RMB and

Cambodian Riel (KHR) interbank regional trading on September 13. On the first trading

day, transaction amount reached KHR 1.05 billion (equivalent to RMB 1.68 million). Bank

of China, Industrial and Commercial Bank of China, Agricultural Bank of China, China

Construction Bank, Bank of Communications, Guangxi Beibu Gulf Bank and Guilin Bank

were first batch of participating banks and price quoting banks for the transactions.

BOCHK issued panda bonds

Bank of China (Hong Kong) successfully issued RMB 9 billion of panda bonds on

September 14. The bonds carried a coupon rate of 4.4% with maturity of 1 year. The total

amount subscribed was RMB 15 billion, or about 1.67 times of the issued amount. RMB

funds raised from the bonds will be used for offshore general working capital purpose,

including supporting corporations going global. On the same day, HSBC (China) also

issued RMB 2 billion worth of bonds with maturity of 3 years. Over one-third of the issued

amount was sold to offshore investors through the “Bond Connect”.

Special Topics

Offshore RMB Express

Due to the launch of Bond Connect, the widening spread of China and US interest

rates, and the appreciation of the RMB’s exchange rate, foreign capital flows into the

Mainland bond market have increased significantly since August. As of August 31, the

value of RMB bonds held by foreign institutions amounted to RMB 965 billion, hitting a

record high. During the first 8 months of this year, foreign institutions increased their

holdings of RMB bonds to RMB 165.2 billion, amongst which Negotiable Certificates of

Deposit (NCD) and Treasury Bonds are most attractive with cumulative newly-added

holding of RMB 88.3 billion and RMB 74.1 billion, respectively. At present, the value of

RMB bonds held by foreign institutions accounted for 1.49% of the total outstanding value

of the Mainland’s bond market, rising from 1.32% at the beginning of this year.

Kam LIU, Analyst

Multiple Factors Boost Foreign

Demand for RMB bonds

5

Firstly, Bond Connect allows foreign

investors easy access to the Mainland's

bond market.

July witnessed the rise in the proportion of

foreign institutions in the Mainland’s bond

market, which should be attributable to the

Bond Connect program. In July, the launch of

Bond Connect allowed overseas investors

easy access to RMB bonds, which heightened

their interest in entering the Mainland’s bond

market. The program’s alignment with

international trading habits such as settlement

mechanism and trading platform drew in

foreign investors.

The average weekly settlement amount

through Bond Connect was RMB 1.4 billion,

and the average weekly settlement number

was 32 in July, indicating that foreign

institutions remained positive on trading

through Bond Connect. It is almost certain that

the Bond Connect program hasn’t fully played

its role at this juncture. In August, increased

holdings of NCD through the platform totalled

about RMB 27 billion, accounting for 40% of

total holdings of NCD by foreign institutions.

This means that nearly 60% of the holdings of

NCD went through traditional channels such as

CIBM and QFII. However, Bond Connect will

likely play a greater role in the future when

Special Topics


overseas institutions become more familiar

with the platform as issues related to tax

arrangements, risk hedging, and credit rating

are gradually addressed. At present, the

share of foreign institutions in the Mainland’s

bond market is less than 2%, while the

weight of the RMB in the SDR basket of

currencies is 10.92%. If that is the goal,

trillions of yuan in capital inflow to the

Mainland’s bond market is possible in the

future.

Secondly, the widening interest rate

gap lures foreign investors and

makes NCD most attractive.

The fast-growing Chinese economy in

the first half of the year and the unexpected

pick-up in manufacturing PMI in August

strengthened market confidence. Although

economic data are likely to slow in the

second half, China’s economy has been

optimized in both growth and structure. In

addition, China’s regulatory policy on NCD

was executed orderly in August. Regulators

included NCD to the Macro Prudential

Assessment (MPA) system and imposed

tighter control on China’s public-offering

funds by restricting their investment scope

and proportion. Both fundamentals and

policy pushed up the yield of NCD of various

maturities by roughly 30 bps to 70 bps.

Higher yields make NCD more attractive.

Data showed that newly-added holdings of

NCD by foreign institutions in August were

nearly 6 times the size of newly-added

holdings of Treasury Bonds, which is unusual.

Against the backdrop of tighter regulation,

most of the NCD circulating in the market

could be of shorter duration and higher

quality in the future, which would help

improve foreign investor’s confidence in this

kind of assets. Foreign institutions will likely

gradually strike a balance in their allocation

to Treasury Bonds and NCD.

Special Topics


On the contrary, US President Trump

confounded leaders from his party by siding

with Democrats on plans to fund the

government and raise the debt ceiling,

postponing the discussion on debt ceiling by

3 months to December. The urgency of time

and Trump’s worsening relationships with

Republicans are likely to affect the tax reform

process. In addition to the uncertainty of

Trump’s policy, sluggish inflation

expectations also affected the interest rate

hike pace, resulting in lower US bond yields.

The spread between China and US 1-year

Treasury bond rose from 150 bps at the end

of last year to 220 bps currently. The spread

between China and US 10-year Treasury

bond widened to over 150 bps, much higher

than the historic average of 120 bps. Clearly,

the continuing expansion of China-US

interest rate spread attracts foreign investors

to RMB bonds.

Thirdly, appreciation of the RMB

improves the value of RMB bonds as

an asset class.

Since the beginning of this year, RMB

has rallied close to 6-7%, increasing foreign

investor’s confidence in RMB assets. The

RMB strengthened earlier this year because

the strong Euro led to a soft greenback.

Since August, the rebounding RMB

increased domestic demand for foreign

exchange settlement and changed market

expectations, which further reinforced its

upward trend. Subsequently, the RMB

weakened after the PBOC suspended a

requirement known as the foreign exchange

risk reserve ratio, no longer requiring foreign

banks to set aside reserves for offshore RMB

deposits in China. At this juncture, RMB has

no basis for either one-way appreciation or

depreciation, so two-way fluctuation and

more flexibility of the RMB will remain the

main trend in the future.

In the medium term, the RMB’s

exchange rate mainly depends on the

Mainland’s fundamentals and changes in the

international environment. Although the

market generally believes that China’s

economy will slow down in the second half of

the year, China’s economy has been

optimized in both growth and structure.

Special Topics


Adding improving international payments, the

RMB is likely to stabilize. On the international

side, in light of strong economic recovery in

Europe, the European Central Bank raised

its GDP forecast for 2017 to 2.2 percent in its

latest monetary policy meeting, the fastest

rate since 2007. According to ECB Governor

Mario Draghi, the Governing Council will

make the bulk of its decisions on tapering

quantitative easing program in October,

resulting in the market’s speculation that the

ECB will announce the QE withdrawal

timeline at the next meeting. If so, long-term

rate spread between US and German may

narrow, and the pattern of a strong Euro and

a weak greenback will continue in the second

half. Against this backdrop, a stable and

even moderately strong RMB can be

expected, which will enhance confidence of

foreign institutions on RMB assets.

Special Topics


The RMB’s Main Trend of Stability

and Moderate Strength

Jian YING, Senior Economist

Recently, volatility of the RMB’s exchange rate has increased significantly. Since the

beginning of July, the RMB’s exchange rate, especially the onshore rate (CNY), rose

sharply and led to a substantial rebound in the offshore rate (CNH). On September 8, the

intraday high of CNY was 6.4346, the highest level since December 2015. In terms of

closing prices on September 8, the cumulative appreciation of CNY and CNH were both

6.7% since the beginning of this year, less than 14.4% for the Euro and 7.8% for the Yen.

However, the appreciation of the RMB in the short term was no less than that of other

currencies, as CNY rebounded 4.6% between the end of June and September 8, keeping

pace with the Euro and the Yen.

After "8.11", The market’s another

concern is, since September 8, the RMB’s

exchange rate has suddenly reversed its

upward trend and gradually stabilized. In the

weekend, the People's Bank of China

announced the adjustment of the foreign

exchange risk reserve policy and no longer

required foreign banks to set aside reserves

for offshore RMB deposits in China. On

September 11 (Monday), the daily

depreciation of CNY amounted to 481 pips.

On September 21, the RMB’s central parity

rate fell by 870 pips, while both CNY and

CNH depreciated by 1.4%.

How should one make sense of the

recent fluctuations of the RMB’s exchange

rate and its future trends? I would like to

share the following thoughts for reference.

Special Topics


1. The recent acceleration of the

RMB’s appreciation mainly reflects

changing market expectation and

increasing domestic demand for foreign

exchange settlement. After "8.11", both the

onshore and offshore markets were

preoccupied by irrational investment

behaviors. Domestic demand for foreign

exchange purchases surged, and RMB funds

flew out of the Mainland, creating strong

selling pressure in the onshore and offshore

market. This year, the RMB’s exchange rate

has stabilized, and market confidence has

gradually increased, bring order to the

offshore market. In this case, a large number

of RMB short positions are unwound. As

China’s economy began to recover, capital

outflows have been contained, and domestic

enterprises are speeding up foreign

exchange settlement, thus pushing up the

RMB’s exchange rate in the short term.

2. There are subtle changes in the

European and the US monetary policy,

and changing fortunes of the Euro and

USD further contributed to the rise of the

RMB’s exchange rate. Although the Fed is

to shrink its balance sheet and is expected to

continue raising interest rates, US economic

growth is moderate and inflationary pressure

is tame, resulting in a moderate pace of rate

hikes by the Fed. On the other hand,

economic growth of the Eurozone has further

accelerated, and the market expects the

European Central Bank to announce the

reduction of debt purchases at the next

monetary policy meeting. The delicate

situation in North Korea also leads safe

haven demands into the Euro and other non-

USD currencies, supporting a strong rebound

in the Euro. The RMB was one of the non-

USD currencies that have appreciated due to

dollar weakness.

Special Topics


3. Further appreciation of the RMB

may outpace fundamentals, creating

negative impacts and running counter to

the goal of maintaining a stable RMB.

From July to early September, CNY

appreciated accumulatively by 3,000 pips

and was up by more than 2100 pips during

the 11 trading days from August 25 to

September 8. Such magnitude of

appreciation was rare in recent years. For

most exporters, the sharp appreciation of the

RMB will erode their meager profits,

eventually leading to a decline in export

competitiveness. At the beginning of the year,

some companies accumulated USD, but

appreciation of the RMB has exceeded the

range of their hedges, resulting in huge

exchange losses. At the beginning of the

year, the PBOC believed the RMB had the

hallmarks of a strong currency, but under the

premise of maintaining its basic stability.

Thus the majority of market participants may

not welcome the recent trend.

4. Parts of the macro adjustment

policies are rapidly adjusted in response

to market changes, which will balance

supply and demand and pull the

exchange rate back on track. The Mainland

has continuously improved the RMB’s

exchange rate mechanism, and domestic

and foreign market participants have become

increasingly rational. However, it will still take

a long time to make the RMB market as

mature as major currency markets such as

Europe and United States. The recent

appreciation of the RMB could have led to

herd behavior of foreign exchange settlement

and a new round of one-way expectation.

The PBOC decided to adjust the foreign

exchange risk reserve policy to reduce the

cost of foreign exchange purchases and

increase demand for the US dollar. Also,

foreign banks are no longer required to set

aside reserves for offshore RMB deposits in

China, which will release RMB to overseas

markets, increasing overseas RMB supply.

These are important measures to contain the

appreciation of the RMB. Recent

performance of the RMB showed that such

measures did produce a significant effect.

Special Topics


Regarding the outlook of the RMB’s

exchange rate, firstly, the pattern of

increased volatility has been established.

From hovering around 6.9 at the beginning of

the year to fluctuating between 6.7 and 6.9 at

mid-year, and then falling quickly back to 6.6

after temporarily rising to 6.4 in September,

the RMB may fluctuate in a wider range in

the future. Secondly, following a number of

reversals between appreciation and

depreciation, short and long positions are

expected to coexist in the market, which will

reduce the likelihood of one-way appreciation

or depreciation of the RMB. Finally, the

economic fundamentals still determine the

trend of the RMB’s exchange rate. As

China’s economy continues to maintain rapid

growth, while the Fed may slow the pace of

interest rate hikes and the Euro strengthens,

the RMB’s exchange rate will likely remain

stable and moderately strong.

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

Aug：532.8bn

End of Sep:

Chart Book


CNH HIBOR Fixing (%) Hong Kong Offshore RMB Bond Issuance (RMB bn)

CNH & CNY China Sovereign Curve (%, 29 Sep 2017)

FTSE-BOCHK Offshore RMB Bond Composite Index

Source: Bloomberg

Source: Bloomberg Source: Bloomberg

Source: BOCHK Global Market estimate

End of Sep:

End of Sep:

Chart Book


RMB Clearing Transaction Value (RMB tn)

SWIFT World payments currency ranking & market share

Source: HKICL

Source: SWIFT

December 2015 August 2017

43.89% USD #1

EUR 29.39% #2

GBP 8.43% #3

JPY 2.78% #4

1.94% CNY

EUR 32.91% #2

GBP 7.05% #3

JPY 3.01% #4

#5 2.31% #5 CNY

CAD #6 1.70%

USD #1 40.72%

1.75% #6

CHF #7 1.63%

AUD #8 1.50%

CAD

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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