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CNH Market Guide Vol CNH Market Guide Vol. 2 rbs.com/mib How did the offshore renminbi (CNH) market come to wield such influence on the onshore foreign exchange (FX) market? Since May 2012, USD/CNY trading onshore has consistently pulled away from the People’s Bank of China (PBOC) daily fixing rate towards the direction of the offshore deliverable USD/CNH. How did the CNH bond market turn from a seller’s market to a buyer’s market recently? As investors’ expectations switch from FX to bond gains, issuers have aligned coupons to onshore yields. Higher yields in turn have boosted investors’ appetite for longer tenors. The market now offers bonds up to 20-year maturity. A confluence of factors – FX and monetary policy reforms, market deregulation, private sector initiatives, and global politico-economic events – brought about a spectacular transformation of the CNH market in its first five years. How will the next five years look? The next phase will be a steeper climb as China attempts to globalise its offshore CNH franchise before it can reach the final goal of becoming a world reserve currency. This guide is a sequel to the CNH Market Guide – A precursor to internationalisation of the Chinese renminbi, which was first published in March 2011. It addresses the various facets of a market that still stands the chance of becoming the world’s next reserve currency, with a focus on the FX, interest rate and bond markets. This guide provides a review of the developments in the first five years of the CNY internationalisation. It contains details of regulations, products types, market depth and market participants. It also contains analysis of how reforms have influenced market trends that have led to the convergence between the onshore and offshore FX, interest rate and bond markets. Content The Roadmap 2 Documentation requirements 39 The first five years 3 Listing practice 40 Market size 3 Reg S is the current norm 40 Market liquidity 6 More rated issuers coming to Market depth 7 the market 41 PBOC’s CNY swap lines 8 Governing law 41 Onshore market access 10 Repatriation rules 42 Offshore-onshore market MOFCOM vs SAFE routes 42 convergence 13 Other RMB schemes 44 The next five years 14 Market Trends 44 Becoming fully convertible 14 Globalising the Franchise 46 Internationalising the CNY 15 Building on Asia’s strengths 46 FX Market 17 Global vs regional hubs 49 Evolution of the market 17 Singapore as second CNY Spot 19 clearing centre 49 Forwards 20 Hong Kong-London partnership 50 Cross currency swaps 21 Self-service centres in Taipei, Tokyo, Sydney 50 Options and futures 21 Shanghai as the ultimate global Interest Rate Market 22 CNY pricing centre 50 Evolution of the market 22 Multilateral platforms 51 Money market 24 Appendix A 52 Interest rate swaps 24 Chronology of Regulatory Sovereign benchmark curve 25 Changes and Events 51 Repo market 25 Appendix B 54 Bond Market 26 Cross-border Payments on Current Account 54 Evolution of the market 26 Appendix C 56 Issuer Base 29 List of Abbreviations 56 Types of issuers 29 Appendix D 57 Motivations and objectives 33 List of Government Agencies 57 Issuance outlook 35 Investor base 36 Types of investors 36 Investor outlook 38 The Roadmap Five years after embarking on internationalising the Chinese Yuan (CNY), it is clear that the Chinese government now has a full roadmap for realising it plans. Deliverable CNY is now commonly referred to as CNH. The first CNH bond was issued in Hong Kong, receiving mixed responses from market participants. Some saw this as an experiment by the Chinese government to gauge market acceptance of the CNY. A common area of concern was the huge price premium of the so-called “dim sum” bonds on onshore bonds. At that time, yields were benchmarked against the USD/CNY non-deliverable forward (NDF) market. The NDF curve reflected market expectations for the CNY, which was very strong then. The curve translated into CNY interest rate levels that were well below both the USD and onshore CNY interest rates. Proving sceptics wrong, the Chinese government has opened up the market at a rapid pace in a sequence resembling a roadmap (see Figure 1): • 2007-2008: Made CNY deliverable Launched CNH bonds; signed swap lines with selected central banks • 2007-2010: Expanded CNH liquidity pool Launched trade settlement scheme; liberalised bond issuance rules; launched CNH interbank market • 2011: Looped back to onshore Launched CNH equities; CNY inward investment flows allowed • 2012: Go global Partnering Hong Kong and London; setting up second CNY clearing centre in Singapore; setting up dedicated lines for other key markets Figure 1: Roadmap to internationalisation of the RMB 2003-2006 2007- 2008 2007-2010 2011 2012 Laying the ground Making CNY Expanding offshore Forming a circular Going global in HK partially deliverable CNY liquidity pool loop back onshore • Bringing CNY to HK • Introducing CNY • Launching CNY • Introducing CNY – • Promoting London residents – denominated trade settlement denominated as global offshore • Floating the CNY investment assets scheme equity IPO RMB centre (bonds issued by • Liberalising CNH • Allowing • Promoting CNY as policy banks) bond issuance rules outward FDI reserve currency • Signing CNY • Making it wholesale • Launching to cash-rich swap lines with – setting up CNH Renminbi QFII central banks strategically- interbank market • Allowing • Setting second CNY targeted central inward FDI clearing centre in banks Singapore Source: RBS 2 The first five years of the CNH market focused mainly on growing the liquidity pool in Hong Kong, and deepening the FX and bond markets. The first five years Growing liquidity pool, deepening The first five years of the CNH market focused mainly on growing the liquidity pool the markets, expanding the in Hong Kong, and deepening the FX and bond markets. It was only in 2011 that geographical reach the focus switched to expanding the market outside of Hong Kong – starting within Asia, notably Singapore and Japan, and more recently further afield to London. The market has grown multi-fold since its launch in 2007, measured in deposits, trade settlement volume and bond issuance (see Figures 2 and 3). Market size • CNY deposits in Hong Kong have grown ten-fold since late 2009. With resident deposits at CNY558 billion (USD88 billion) as of June 2012, deposits account for 8.8% of Hong Kong banks’ total deposit base or 17.5% of their foreign currency deposit base. However, these account for a mere 0.6% of China’s total deposits. There are four basic channels through which CNY cash can flow from onshore into Hong Kong banks: − Hong Kong residents’ conversion of HKD to CNY, subject to a CNY20,000 daily limit. Banks clear the HKD/CNY exchange under a special clearing agreement set up in 2005. On 25 Jul 2012, non-Hong Kong residents are allowed to open CNY account in Hong Kong with unlimited limit. However, banks are not allowed to clear their HKD/CNY transactions through this special clearing agreement, the Shanghai conversion window or the cross- border remittance channels. Effectively, the non-Hong Kong resident accounts would not contribute to the build-up of CNY liquidity offshore. − Exports to China settled in CNY. This is subject to an aggregate clearing limit of +/-CNY8 billion at the Bank of China (Hong Kong) Limited for the net total of exports and imports. Over the past two years, the flows between exports and imports have also become more balanced from an earlier 3:1 ratio between Chinese imports and exports (see Figure 4). − Chinese corporates’ outward direct investments. This is subject to individual quotas. − Chinese tourists’ overseas spending. Since the launch of the Individual Visit Scheme in 2003 by the Hong Kong SAR government, which enabled residents of 49 cities in China to visit Hong Kong in their individual capacity, tourists from the mainland have soared 45% on a compounded annual basis from 2007-2011 (see Figure 5). 3 • There has also been a rapid build-up of CNY deposits in other offshore centres but these remained much smaller than in Hong Kong. This is because these other centres started later than Hong Kong, and had no support of a direct central clearing line with China. In Singapore, CNY non-bank deposits with Singapore banks have reached CNY60 billion as at June 2012; and in London, these deposits reached CNY35 billion as at end 2011. • The CNY trade settlement scheme in Hong Kong has grown at an even faster pace than deposits after the last regulatory hurdles were removed for Chinese exporters earlier this year (Figure 6 shows the phases of expansion for this scheme). In the 12 months leading up to June 2012, trade settlement volume reached CNY2.32 trillion (USD365 billion). This figure already exceeded 1.2 times of the China-Hong Kong bilateral trade, suggesting that third parties outside of Hong Kong have begun settling their trade with China in CNY via Hong Kong banks. On the other hand, the figure is barely 10% of China’s total external trade, suggesting there is still plenty of scope for China to drive the use of CNY for settling its trade with its huge base of foreign trade partners. • CNY-denominated bond issuance appears to grow relatively slower but it was still a five-fold increase since 2010. The outstanding stock of corporate bonds, certificate deposits and bonds issued by China’s Ministry of Finance (MOF) currently stands at CNY 343bn (USD 55bn). This is already 55% of Hong Kong’s total HKD-denominated private sector bond market. The bulk of the CNH issuance is dominated by financial institution issuance, concentrated mostly in tenors of three years and below.
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