Offshore RMB Express Issue 44‧ October 2017 Contents
Part 1 Market Review 1
Part 2 Policy and Peers Updates 3
Part 3 Special Topics 5
Part 4 Chart Book 15
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] Market Review
Offshore RMB Market Continues to Improve
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. .
1. The flexibility of offshore RMB HIBOR fixing rates were relatively stable in exchange rate improved September. On September 29, the O/N, 1- week and 3-month CNH HIBOR rates were A year after the RMB was included in 3.73%, 4.27% and 4.69%, respectively, up the SDR currency basket, the flexibility of the from the previous month but remaining RMB’s exchange rate has greatly improved, largely stable. and the exchange rate’s two-way fluctuation has become more prominent. Since the 2. Major RMB business indicators beginning of this year, the onshore RMB improved exchange rate against the US dollar has appreciated 4.33%, while it was relatively RMB deposits in Hong Kong decreased stable against a basket of currencies. Since by 0.37% MoM to RMB 532.8 billion in September, the RMB’s exchange rate August 2017. The total remittance of RMB for against the US dollar has undergone a V- cross-border trade settlement amounted to shape trajectory, appreciating in early RMB 336.0 billion in August, up by RMB 6.4 September and retreating since mid- billion compared with RMB 329.6 billion in September. On September 29, CNH July. In Taiwan’s offshore market, as of the depreciated against USD by 1.02% MoM and end of August 2017, total RMB deposits closed at 6.6634. Meanwhile, CNY rebounded for 4 consecutive months, up by depreciated against USD by 0.57% MoM and 0.22% or RMB 0.7 billion from the previous closed at 6.6339. The average spread of the month to RMB 310 billion. month between CNH and CNY almost . disappeared. As for HIBOR fixing, CNH
Offshore RMB Express 1 Market Review
3. International use of RMB increased time. Eight currencies are now separately listed, namely, the US dollars, Euros, RMB, SWIFT data show that in August 2017, Yen, Pound, Australian dollar, Canadian the RMB maintained its position as the fifth dollar, and Swiss francs. All other currencies most active currency for global payments are grouped under "other currencies". with a share of 1.94%, a decrease of 0.06 percentage points from the previous month. 5. The domestic capital market is Hong Kong is still the largest offshore RMB opening up further center, with RMB trading volume accounting for 76.23% of the total offshore RMB According to statistics from the State turnover, followed by the UK and Singapore, Administration of Foreign Exchange (SAFE), accounting for 5.19% and 4.41% respectively. the approved quota for RQFII totaled RMB RMB RTGS turnover was RMB 18.74 trillion 589.5 billion as of September 29, up by RMB in September 2017 with a MoM decrease of 4.6 billion compared with a month ago, with a 7.2%. In the first nine months of this year, total of 191 qualified foreign institutional RTGS turnover increased by 5.0% YoY to investors having been approved. At the same RMB 161.08 trillion. time, the approved quota for QFII totaled RMB 94.5 billion as of September 29, up by 4. The international reserve currency RMB 0.5 billion compared with a month ago, function of RMB has gradually with a total of 287 qualified foreign strengthened institutional investors having been approved. In addition, the approved quota for QDII According to the COFER report from the totaled RMB 90 billion as of September 29, IMF recently released, as of the second with a total of 132 qualified foreign quarter of 2017, RMB reserves held by other institutional investors having been approved. countries rose to USD 99.36 billion, up by No new quotas were approved in the past 22 9.5% compared with the end of 2016 and months. accounting for 1.07% of the total. On March 31, the COFER report listed the holdings of RMB foreign exchange reserves for the first
２ Offshore RMB Express 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.
Offshore RMB Express 3 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”.
4 Offshore RMB Express Special Topics
Multiple Factors Boost Foreign Demand for RMB bonds
Kam LIU, Analyst
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.
Firstly, Bond Connect allows foreign The average weekly settlement amount investors easy access to the Mainland's through Bond Connect was RMB 1.4 billion, bond market. and the average weekly settlement number was 32 in July, indicating that foreign July witnessed the rise in the proportion of institutions remained positive on trading foreign institutions in the Mainland’s bond through Bond Connect. It is almost certain that market, which should be attributable to the the Bond Connect program hasn’t fully played Bond Connect program. In July, the launch of its role at this juncture. In August, increased Bond Connect allowed overseas investors holdings of NCD through the platform totalled easy access to RMB bonds, which heightened about RMB 27 billion, accounting for 40% of their interest in entering the Mainland’s bond total holdings of NCD by foreign institutions. market. The program’s alignment with This means that nearly 60% of the holdings of international trading habits such as settlement NCD went through traditional channels such as mechanism and trading platform drew in CIBM and QFII. However, Bond Connect will foreign investors. likely play a greater role in the future when
Offshore RMB Express 5 Special Topics
overseas institutions become more familiar addition, China’s regulatory policy on NCD with the platform as issues related to tax was executed orderly in August. Regulators arrangements, risk hedging, and credit rating included NCD to the Macro Prudential are gradually addressed. At present, the Assessment (MPA) system and imposed share of foreign institutions in the Mainland’s tighter control on China’s public-offering bond market is less than 2%, while the funds by restricting their investment scope weight of the RMB in the SDR basket of and proportion. Both fundamentals and currencies is 10.92%. If that is the goal, policy pushed up the yield of NCD of various trillions of yuan in capital inflow to the maturities by roughly 30 bps to 70 bps. Mainland’s bond market is possible in the Higher yields make NCD more attractive. future. 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. 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
6 Offshore RMB Express Special Topics
On the contrary, US President Trump Since August, the rebounding RMB confounded leaders from his party by siding increased domestic demand for foreign with Democrats on plans to fund the exchange settlement and changed market government and raise the debt ceiling, expectations, which further reinforced its postponing the discussion on debt ceiling by upward trend. Subsequently, the RMB 3 months to December. The urgency of time weakened after the PBOC suspended a and Trump’s worsening relationships with requirement known as the foreign exchange Republicans are likely to affect the tax reform risk reserve ratio, no longer requiring foreign process. In addition to the uncertainty of banks to set aside reserves for offshore RMB Trump’s policy, sluggish inflation deposits in China. At this juncture, RMB has expectations also affected the interest rate no basis for either one-way appreciation or hike pace, resulting in lower US bond yields. depreciation, so two-way fluctuation and The spread between China and US 1-year more flexibility of the RMB will remain the Treasury bond rose from 150 bps at the end main trend in the future. of last year to 220 bps currently. The spread between China and US 10-year Treasury In the medium term, the RMB’s bond widened to over 150 bps, much higher exchange rate mainly depends on the than the historic average of 120 bps. Clearly, Mainland’s fundamentals and changes in the the continuing expansion of China-US international environment. Although the interest rate spread attracts foreign investors market generally believes that China’s to RMB bonds. economy will slow down in the second half of the year, China’s economy has been Thirdly, appreciation of the RMB optimized in both growth and structure. 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.
Offshore RMB Express 7 Special Topics
Adding improving international payments, the timeline at the next meeting. If so, long-term RMB is likely to stabilize. On the international rate spread between US and German may side, in light of strong economic recovery in narrow, and the pattern of a strong Euro and Europe, the European Central Bank raised a weak greenback will continue in the second its GDP forecast for 2017 to 2.2 percent in its half. Against this backdrop, a stable and latest monetary policy meeting, the fastest even moderately strong RMB can be rate since 2007. According to ECB Governor expected, which will enhance confidence of Mario Draghi, the Governing Council will foreign institutions on RMB assets. 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
8 Offshore RMB Express 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 On September 21, the RMB’s central parity concern is, since September 8, the RMB’s rate fell by 870 pips, while both CNY and exchange rate has suddenly reversed its CNH depreciated by 1.4%. upward trend and gradually stabilized. In the weekend, the People's Bank of China How should one make sense of the announced the adjustment of the foreign recent fluctuations of the RMB’s exchange exchange risk reserve policy and no longer rate and its future trends? I would like to required foreign banks to set aside reserves share the following thoughts for reference. for offshore RMB deposits in China. On September 11 (Monday), the daily depreciation of CNY amounted to 481 pips.
Offshore RMB Express 9
Special Topics
1. The recent acceleration of the growth is moderate and inflationary pressure RMB’s appreciation mainly reflects is tame, resulting in a moderate pace of rate changing market expectation and hikes by the Fed. On the other hand, increasing domestic demand for foreign economic growth of the Eurozone has further exchange settlement. After "8.11", both the accelerated, and the market expects the onshore and offshore markets were European Central Bank to announce the preoccupied by irrational investment reduction of debt purchases at the next behaviors. Domestic demand for foreign monetary policy meeting. The delicate exchange purchases surged, and RMB funds situation in North Korea also leads safe flew out of the Mainland, creating strong haven demands into the Euro and other non- selling pressure in the onshore and offshore USD currencies, supporting a strong rebound market. This year, the RMB’s exchange rate in the Euro. The RMB was one of the non- has stabilized, and market confidence has USD currencies that have appreciated due to gradually increased, bring order to the dollar weakness. 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
Offshore RMB Express 11 14 Special Topics
3. Further appreciation of the RMB exchange rate mechanism, and domestic may outpace fundamentals, creating and foreign market participants have become negative impacts and running counter to increasingly rational. However, it will still take the goal of maintaining a stable RMB. a long time to make the RMB market as From July to early September, CNY mature as major currency markets such as appreciated accumulatively by 3,000 pips Europe and United States. The recent and was up by more than 2100 pips during appreciation of the RMB could have led to the 11 trading days from August 25 to herd behavior of foreign exchange settlement September 8. Such magnitude of and a new round of one-way expectation. appreciation was rare in recent years. For The PBOC decided to adjust the foreign most exporters, the sharp appreciation of the exchange risk reserve policy to reduce the RMB will erode their meager profits, cost of foreign exchange purchases and eventually leading to a decline in export increase demand for the US dollar. Also, competitiveness. At the beginning of the year, foreign banks are no longer required to set some companies accumulated USD, but aside reserves for offshore RMB deposits in appreciation of the RMB has exceeded the China, which will release RMB to overseas range of their hedges, resulting in huge markets, increasing overseas RMB supply. exchange losses. At the beginning of the These are important measures to contain the year, the PBOC believed the RMB had the appreciation of the RMB. Recent hallmarks of a strong currency, but under the performance of the RMB showed that such premise of maintaining its basic stability. measures did produce a significant effect. 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
Offshore RMB Express 13 Special Topics
Regarding the outlook of the RMB’s reduce the likelihood of one-way appreciation exchange rate, firstly, the pattern of or depreciation of the RMB. Finally, the increased volatility has been established. economic fundamentals still determine the From hovering around 6.9 at the beginning of trend of the RMB’s exchange rate. As the year to fluctuating between 6.7 and 6.9 at China’s economy continues to maintain rapid mid-year, and then falling quickly back to 6.6 growth, while the Fed may slow the pace of after temporarily rising to 6.4 in September, interest rate hikes and the Euro strengthens, the RMB may fluctuate in a wider range in the RMB’s exchange rate will likely remain the future. Secondly, following a number of stable and moderately strong. reversals between appreciation and depreciation, short and long positions are expected to coexist in the market, which will
14 Offshore RMB Express Chart Book
Market Indicators
Hong Kong RMB Deposits (in RMB bn) RMB Cross-border Trade Settlement (RMB bn)
1200
1000
800
600
400 Aug：532.8bn
200
0 01/10 01/11 01/12 01/13 01/14 01/15 01/16 01/17 Source: HKMA Source: HKMA
USD-CNH and USD-CNY Exchange Rates
End of Sep:
Source: Bloomberg
Offshore RMB Express 15 Chart Book
CNH HIBOR Fixing (%) Hong Kong Offshore RMB Bond Issuance (RMB bn)
End of Sep:
Source: Bloomberg Source: BOCHK Global Market estimate
CNH & CNY China Sovereign Curve FTSE-BOCHK Offshore RMB Bond Composite Index (%, 29 Sep 2017)
End of Sep:
Source: Bloomberg Source: Bloomberg
16 Offshore RMB Express Chart Book
RMB Clearing Transaction Value (RMB tn)
Source: HKICL
SWIFT World payments currency ranking & market share
December 2015 August 2017 #1 USD 43.89% #1 USD 40.72% #2 EUR 29.39% #2 EUR 32.91% #3 GBP 8.43% #3 GBP 7.05% #4 JPY 2.78% #4 JPY 3.01% #5 CNY 2.31% #5 CNY 1.94% #6 CAD 1.70% #6 CAD 1.75% #7 CHF 1.63% #8 AUD 1.50%
Source: SWIFT
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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.