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Investment Strategy & Research White Paper Renminbi November 2014 Renminbi Hub Switzerland Switzerland Holds Potential for China’s Currency

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Page 1: White Paper Renminbi November 2014 Renminbi Hub ... · tial of renminbi investments for private investors in Switzerland, it’s worth taking a look abroad. Luxembourg is the largest

Investment Strategy & Research

White Paper Renminbi November 2014

Renminbi Hub SwitzerlandSwitzerland Holds Potential for China’s Currency

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Investment Strategy & Research

Renminbi – Renminbi-Hub Switzerland 2

Impressum

Publisher Giles Keating

Head of Research for Private Banking and Wealth Management

+41 44 332 22 33

[email protected]

Editorial deadline November 2014 Visit us on the Internet at www.credit-suisse.com/research Copyright Information from this publication may be quoted if proper reference is

made to the source.

Copyright © 2014 Credit Suisse Group AG and/or its affiliates. All rights

reserved.

Authors

Koon How Heng, +65 6212 6003

[email protected]

Peter Marti +41 44 333 17 64

[email protected]

Claude Maurer +41 44 333 41 90

[email protected]

Cesare Ravara + 41 44 333 51 81

[email protected]

Christine Schmid + 41 44 334 56 43

[email protected]

With the collaboration of

Manuel Rybach, Jannick Dousse

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Renminbi – Renminbi-Hub Switzerland 3

Content

1. The rise of China also benefits Switzerland 5

2. The international renminbi market is growing rapidly 7

3. Renminbi hub Switzerland: Credit Suisse plays an important role 11

Disclosures 13

Global disclaimer / important information 13

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Renminbi – Renminbi-Hub Switzerland 5

1 The rise of China also benefits Switzerland

In a short space of time, the People’s Republic of China has quickly advanced to become the world’s second-largest national economy and is even already the world’s number one exporter. China’s currency, the renminbi, ranks among the ten most frequently traded currencies world-wide, occupying seventh place, one notch ahead of the Swiss franc. Today China’s economy is a world leader in the high-tech sector. China, for instance, manufactures more than half of all solar panels and wind turbines installed worldwide. Chinese enterprises have grown strongly in areas such as electrical engineering, medical technology and electronics. China’s share of world gross domestic product currently stands at around 16%, more than two times higher than at the start of the new millennium (see Figure 1). China’s economic ascent is improving incomes, boosting savings and enhancing investment opportunities for large swaths of the country’s population. China is an important foreign trade partner for Switzerland. In 2013, 4% of Swiss exports went to China and 6% of Swiss imports came from China. According to statistics from the Swiss Customs Administration, China purchased CHF 8.8 billion worth of Swiss products in 2013, primarily machinery and instrumentation, watches, and chemical and pharmaceutical products. Over the same period, Switzerland imported CHF 11.4 billion worth of Chinese goods, primarily machinery, textiles, clothing, watch components and chemical products (see Figures 2 and 3). Add to that trade in services, mainly in the areas of banking, insurance, logistics, product and quality testing, and business consulting services. Statistical surveys conducted by the Swiss Na-tional Bank (SNB) show that Swiss foreign direct investment in China has more than doubled over the last five years to a volume of around CHF 15 billion. Over the same time frame, Swiss companies’ total personnel headcount in China has increased from 120,000 to 200,000, which equates to 7% of all Swiss company staff employed outside Switzerland. The trade and invest-ment flows between Switzerland and China additionally involve countless ancillary suppliers and jobs, as well as myriad financial transactions, in both countries. The free trade agreement (FTA) between Switzerland and China that went into effect on July 1, 2014, promotes and enhances economic cooperation between the two countries. The FTA covers mutual customs exemptions for trade involving industrial and agricultural products, as well as eased market access conditions in broad areas of trade in services. Around 95% of the trade volume between Switzerland and China benefits from these facilitations, which went into force on the FTA’s inception date, though some transition periods are specified in the treaty.

China’s rapid economic ascent

Substantial trade and investment flows between Switzerland and China

Free trade agreement cements longstanding trade relations

Figure 1 Figure 2 China’s economic importance is steadily increasing Switzerland’s top seven import source countries Imports in CHF billion

Source: Datastream, Credit Suisse; IMF forecast for 2013 onward Source: Swiss Customs Administration, Credit Suisse

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China's share of world GDP (at purchasing-power parity)

China's real GDP growth (year-on-year change in %)

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Switzerland is the first country in continental Europe to sign such a comprehensive trade agree-ment with China. Neither the European Union nor the USA can count on even remotely similar trade facilitations. Switzerland Global Enterprise (formerly OSEC) estimates the potential cus-toms duty savings on Swiss exports to China at approximately CHF 5.8 billion by 2028. Financial products are indispensable to trade. Knowing this, in May 2013 China and Switzerland agreed to initiate a financial dialogue for the purpose of cultivating and deepening cooperation between the two countries also in the area of finance. At the first meetings in Shanghai in late 2013 and in Bern in mid-2014, discussions centered on Switzerland’s increased involvement in international usage of the renminbi and on issues regarding regulation and supervision, selling and distribution of financial services, and the participation of Switzerland in China’s investment programs. The Chinese trade delegation clearly signaled its interest in also exploring opportuni-ties for cooperation in banking-related research, education and advanced training. Both delega-tions declared themselves in favor of continuing the financial dialogue. The next meeting may take place in China during the first half of 2015. Inside China, the renminbi is not freely convertible due to the country’s restrictions on currency trading and payment transactions. The renminbi’s value against the US dollar (onshore ex-change rate, CNY) is instead set daily by the People’s Bank of China. Nevertheless, interna-tionalization of the Chinese currency is accelerating because the renminbi is freely tradable out-side China (offshore exchange rate, CNH; see Figure 4). This setup opens scope for a Swiss offshore renminbi hub for trade finance or foreign-exchange trading, for example. The benefits are obvious. A Swiss renminbi hub simplifies transactions in the Chinese currency for Swiss en-terprises by enabling them, for instance, to conduct transactions in their own time zone. This lowers costs, as does the fact that Chinese exporters sometimes grant substantial price dis-counts if they are able to invoice in renminbi. Benefits present themselves for investors and cor-porate currency risk managers as well because such a hub allows renminbi to be traded against other currencies right from Switzerland. A Swiss renminbi hub is beneficial for both Switzerland and China since it aids the achievement of the economic objectives that both countries em-barked upon when they signed their free trade agreement.

Rapprochement also in the financial sector

Switzerland in focus as a renminbi hub

Figure 3 Figure 4 Switzerland’s top seven export destinations Offshore and onshore renminbi move in lockstep Exports in CHF billion Onshore = CNY, offshore = CNH

Source: Swiss Customs Administration, Credit Suisse Source: Bloomberg, Datastream, Credit Suisse

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2 The international renminbi market is growing rapidly

Switzerland is the world’s largest asset management hub, with more than CHF 6 trillion of as-sets under management. A little more than half of that stems from abroad, making Switzerland the world leader in cross-border wealth management, ahead of Hong Kong and Singapore. Switzerland correspondingly holds a lot of potential for the renminbi both as an investment cur-rency and a currency for commerce. A major step toward a Swiss renminbi hub was taken this summer when a bilateral currency swap line agreement between the Swiss National Bank (SNB) and the People’s Bank of China (PBoC) went into effect in July 2014. This agreement allows renminbi and Swiss francs to be purchased and repurchased between the two central banks up to a maximum limit of CNY 150 billion, or CHF 21 billion. This enables the SNB to provide liquidity in renminbi when needed, thus significantly enhancing security for investors. The swap line agreement has tech-nical but also symbolic value: China is interested in cooperating also with Switzerland on its way toward globalizing the renminbi.

Die Schweizerische

The bilateral renminbi swap agreements in place worldwide add up to an aggregate amount of CNY 2.5 trillion, which equates to around CHF 388 billion (see Figure 5). As the next step to-ward becoming a renminbi hub, Switzerland would need a Chinese bank with authorization from the Swiss Financial Market Supervisory Authority (FINMA) to clear renminbi transactions. Clear-ing basically involves the reconciliation and confirmation of accounts required to conclude finan-cial transactions. For practical considerations, a Chinese clearing bank to be set up in Switzer-land would probably want to apply for a license to conduct other banking business as well. The authorization and establishment of a Chinese clearing bank in Switzerland should thus be seen as an investment in the interests of both countries.

The SNB itself is likely to make use of the opportunity to invest in renminbi. As part of the bilat-eral swap line agreement, the SNB has been granted a renminbi investment quota of approxi-mately CHF 2 billion that it can use to invest in the Chinese bond market. Holding renminbi assets enables the SNB to further diversify its foreign-exchange reserves. To gauge the poten-tial of renminbi investments for private investors in Switzerland, it’s worth taking a look abroad. Luxembourg is the largest investment fund hub in Europe, and mutual funds that invest in renminbi assets are already available there. According to the Commission de Surveillance du

Switzerland holds potential for renminbi investments

Accord between Swiss National Bank and People’s Bank of China

Figure 5

Twenty-five bilateral swap line agreements with a total volume of over CNY 2.5 trillionTotal volume in 2013, in CNY billion

Source: Swiss State Secretariat for Economic Affairs, Credit Suisse, IDC

A clearing bank would facilitate transaction settlement

Switzerland holds renminbi investment potential…

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Secteur Financier (CSSF), renminbi-denominated funds and funds investing in renminbi assets1 account for around 10.7%, or EUR 256 billion, of the total assets under management in Lux-embourg. EUR 194 billion of that is held in equity products (8.1%) and EUR 61.6 billion in fixed-income products (2.6%). Evidently there is relatively high demand for renminbi assets. If we superimpose the 10.7% renminbi slice of investment fund center Luxembourg onto the Swiss asset management hub, the CHF 6 trillion worth of total assets currently under manage-ment in Switzerland implies a renminbi market potential of approximately CHF 600 billion, which equates to around CNY 3.8 trillion at today’s exchange rate. If we take into account that Swiss investors have a higher preference for domestic assets (home bias) and accordingly apply a smaller 2% renminbi asset share for them (a common allocation percentage used for mixing un-conventional assets into a portfolio), the potential for renminbi financial products still amounts to more than CHF 300 billion, or CNY 1.9 trillion. In addition to asset management, other renminbi business is certainly also conceivable in the corporate client and investment banking segments, but is not factored into the calculation above. According to SWIFT, in 2014 Swiss companies have transacted 8% of their payments in their business dealings with China and Hong Kong in renminbi. That figure is 31% higher than in 2013, but is lower than the numbers for other Euro-pean countries (see Figure 6).

1 See the CSSF website for the definition of “RMB-denominated funds and funds investing in RMB assets.”

…of CHF 340–600 billion

Figure 6

Swiss companies still make comparatively little use of the renminbi International renminbi flows from and to China/Hong Kong as a percentage of total payments; increase/decrease in absolute

flows shown next to the country name

Source: SWIFT, Credit Suisse

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Renminbi – Renminbi-Hub Switzerland 9

Rapid growth of the international renminbi market

Asian markets vigorously harnessing renminbi potential Offshore renminbi deposits in Asia

Renminbi deposits in CNY billion

Offshore investments in renminbi have increased by morethan CNY 1.4 trillion since mid-2009. The lion’s share ofthat (around 70%) has gone to Hong Kong. But Taiwanand Singapore, each home to around 15% of the world’soffshore renminbi deposits, have also become majorrenminbi trading hubs in the meantime even thoughrenminbi investments have only been possible in Taiwansince the second quarter of 2013 and in Singapore onlysince Q3 2013. Increases in demand by up toCNY 200 billion annually enable a rapid catch-up andclearly illustrate the needs of investors.

Source: Bloomberg, Monetary Authority of Singapore, Credit Suisse

Increased authorizations for onshore investments Authorized QFII quotas

In CNY billion

The renminbi is gaining importance not just outside China.China is increasingly opening its doors to onshore invest-ments by qualified investors. A qualified foreign institution-al investor (QFII) can obtain a license authorizing the QFIIto trade stocks in China, i.e. the QFII can buy and sellrenminbi-denominated equities on Chinese onshore stockexchanges such as Shanghai or Shenzhen. The volumeand number of authorizations are continually increasingand have roughly doubled in magnitude over a year’s time.The «Hongkong Shanghai Stock Connect» launched 17thof. November 2014 will increase the volume of tradedChinese equities and bonds.

Source: SAFE, Credit Suisse

Already the seventh most important trade currency New renminbi-denominated bond issuance

In CNY billion

The renminbi is rapidly gaining importance. In 2010, 3%of goods worldwide were traded in renminbi. By the end of2013, that sales percentage had sextupled to around18%. End-2013 data from SWIFT indicate that therenminbi has now become the world’s seventh most im-portant trade currency, just ahead of the Swiss franc. Therenminbi bond issuance market has also gathered speedsince the start of 2010, going from zero to a volume ofmore than CNY 700 billion, with the trend still pointedupward. The renminbi and renminbi-denominated assetsbelong in a globally diversified portfolio today under theassumption that China’s currency will advance to becomea liquid world reserve currency.

Source: People’s Bank of China, Credit Suisse

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3 Renminbi hub Switzerland: Credit Suisse plays an important role

In the mid-1950s, Swiss banks were among the first Western institutions to establish relations with Chinese counterparts: Credit Suisse did this back in 1955 with the Bank of China. In 1985, Credit Suisse opened a branch office in Beijing. Against the backdrop of the eastward shift in the balance of global economic power and the Chinese currency’s increasingly important role in foreign-exchange markets, in mid-2012 Credit Suisse advocated positioning Switzerland internationally as a renminbi hub. That same year, Credit Suisse also began offering clients basic products in the Chinese currency such as accounts, payment transactions and foreign-exchange trading. Together with other banks, Credit Suisse is intensely engaged at various levels in further bilat-eral cooperation in the financial sector. To this end, top representatives of commercial banks, central banks and policymaking bodies in China and Switzerland met in late June 2014 at the Credit Suisse seminar center at the invitation of the Swiss Bankers Association and the China Banking Association. At this first joint financial roundtable, they discussed possible areas for banking-related cooperation. Both sides particularly highlighted Switzerland’s strengths as an economic center, which enhance Switzerland’s prospects of becoming a successful renminbi hub. At the outset of the meeting, a memorandum of understanding regarding future coopera-tion between the two banking associations was signed, laying the groundwork for the next fi-nancial roundtable meeting, which is expected to take place in China in 2015.

The 2014 financial roundtable (from left to right): Patrick Odier, Chairman of the Swiss Bankers Association; Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank; Zhou Xiaochuan, Governor of the People’s Bank of China; Urs Rohner, Chairman of the Board of Directors of Credit Suisse; Eveline Widmer-Schlumpf, Swiss Federal Councilor and Swiss Finance Minister; Kaspar Villiger, former Swiss Federal Councilor and former Chairman of the Board of Directors of UBS. Photographer: Sandra Amport

As a bank for entrepreneurs, for years Credit Suisse has been successfully escorting its corpo-rate clients through the first phase of the internationalization of the renminbi. With a variety of products and with teams of specialists in Zurich, Hong Kong and China, Credit Suisse supports enterprises in renminbi currency management, but also in dealing with general issues regarding access to the large but complex Chinese market.

Credit Suisse has been active in China since 1955

Active promotion of financial dialogue

Operations for clients

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Risk warning

Every investment involves risk, especially with regard to fluctuations in value and return. If an investment is denominated in a currency other than your base currency, changes in the rate of exchange may have an adverse effect on value, price or income. For a discussion of the risks of investing in the securities mentioned in this report, please refer to the following Internet link: https://research.credit-suisse.com/riskdisclosure This report may include information on investments that involve special risks. You should seek the advice of your independent financial advisor prior to taking any investment decisions based on this report or for any necessary explanation of its contents. Further information is also available in the information brochure “Special Risks in Securities Trading” available from the Swiss Bankers Association. Past performance is not an indicator of future performance. Performance can be affected by commissions, fees or other charges as well as exchange rate fluctuations.

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Historical returns and financial market scenarios are no guarantee of future perfor-mance. The price and value of investments mentioned and any income that might accrue could fall or rise or fluctuate. Past performance is not a guide to future perfor-mance. If an investment is denominated in a currency other than your base currency, changes in the rate of exchange may have an adverse effect on value, price or income. You should consult with such advisor(s) as you consider necessary to assist you in making these determinations. Investments may have no public market or only a restricted secondary market. Where a secondary market exists, it is not possible to predict the price at which investments will tade in the market or whether such market will be liquid or illiquid.

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Article contributions by Investment Strategists are not research reports. Investment Strategists are not part of the CS Research department. CS has policies in place designed to ensure the independence of CS Research Department including policies relating to restrictions on trading of relevant securities prior to distribution of research reports. These policies do not apply to Investment Strategists. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, a trading idea regarding this security. Trading ideas are short term trading opportunities based on market events and catalysts, while company recommendations reflect investment recommendations based on expected total return over a 6 to 12-month period as defined in the disclosure section. Because trading ideas and company recommendations reflect different assumptions and analytical methods, trading ideas may differ from the company recommendations. In addition, CS may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report.

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CS policy is to publish research reports, as it deems appropriate, based on develop-ments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. CS policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. The Credit Suisse Code of Conduct to which all employees are obliged to adhere, is accessible via the website at: https://www.credit-suisse.com/governance/doc/code_of_conduct_en.pdf For more detail, please refer to the information on independence of financial re-search, which can be found at: https://www.credit-suisse.com/legal/pb_research/independence_en.pdf The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including CS’s total revenues, a portion of which is generated by Credit Suisse Investment Banking business.

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Renminbi – Renminbi-Hub Switzerland 14

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