Offshore RMB Express Issue 75 ‧ May 2020 Contents Part 1 Market Review 1 Part 2 Policy and Peers Updates 4 Part 3 Special Topic 7 Part 4 Chart Book 14 Editors： Lynn Zhang Tel ：+852 2826 6586 Email : [email protected] Sharon Tsang Tel ：+852 2826 6763 Email: [email protected] Matthew Leung Tel：+ 852 3982 7177 Email: [email protected] Market Review Offshore RMB market stabilized after financial market turbulence It has been 3 months since the World Health Organization announced Covid-19 constituted as a Public Health Emergency of International Concern (PHEIC). The virus finally starts to show signs of peaking. After a wave of financial turbulence, we see a decrease in risk aversion. Throughout the period, RMB showed resilience and fluctuated between 7.05 and 7.10 for most of the time. Major offshore RMB business indicators improved, with both Hong Kong RMB deposits and cross border trade remittance numbers reaching recent years’ high. Foreign institutions continued to increase China bond holdings, while Bond Connect provides additional service. I. RMB showed resilience and year. The International Monetary Fund (IMF) continued two-way fluctuation in April predicts the world's current economic crisis to lead to the worst downturn since the Great Coronavirus outbreak has caused an Depression. Risk aversion is expected to unprecedented challenge to the global continue in financial markets, supporting economy, bringing economic activities of USD. RMB has shown resilience, stabilizing most countries to a halt. The US Dollar Index after a wave of depreciation since the (DXY) retreated a bit after reaching record beginning of the year and fluctuating highs last month, but remained relatively high between 6.84 and 7.13. It remained relatively at around 100 in April, posing pressure to stable compare to European and emerging RMB. CNH remained weak, and gently rose market currencies. Recently, there were to 7.05 in mid-April after falling to 7.13 at heated debates about issues regarding start of the month, then stabilizing at 7.09. As Covid-19 in the US, and the RMB may face of April 30, the RMB’s central parity rate short term volatility if the debates trigger against the USD closed at 7.0571, down another round of trade disputes. In general, 0.4% MoM. CNH closed at 7.817, down China’s economy is robust with strong 0.17% MoM. CNY closed at 7.0633, down fundamentals. Also, there is interim success 0.27% MoM. for curbing the virus in China. From medium to long term perspective, RMB is expected to Europe and the US are likely to extend maintain a two-way fluctuation trend. Covid-19 lockdowns to the second half of the Offshore RMB Express 1 Market Review CNH Hibor was stable in April. As of April 29, payments currencies increased by 38.5%. the O/N, 1-week and 3-month CNH HIBOR rates were 1.317%, 1.455% and 2.247%, III. Foreign institutions continued to respectively. increase China bond holdings; Bond Connect provides additional service II. Major offshore RMB business indicators reached recent years’ high Net capital inflow of foreign holdings in China bonds was RMB 73.6 billion in Q1 2020. As By the end of March 2020, RMB deposits in of March 2020, foreign holdings in Chinese Hong Kong amounted to RMB 664.2 billion, bonds reached RMB 2.26 trillion, with a up by 4.0% MoM and up by 10.3% YoY. With monthly net outflow of RMB 20 billion. the addition of RMB 35.8 billion of RMB According to statistics of ChinaBond, net Certificate of Deposits, RMB capital pool of capital inflow of foreign holdings in China Hong Kong amounted to RMB 700 billion, a bonds was RMB 43.3 billion, and total foreign 3.5-year high. RMB loans outstanding in holdings in Chinese bonds reached RMB 2 Hong Kong were RMB 157.8 billion, down by trillion for the first time as of April 2020. 1.1% MoM and up by 37.3% YoY. The total China sees progress in controlling the virus, remittance of RMB for cross-border trade and the economy starts to rebound with settlement was RMB 645.7 billion in March, sufficient foreign reserves. Foreign the highest level since December 2015, up institutions continue to increase their by 39% YoY and up significantly by 59.6% holdings of RMB assets for the purpose of compared to beginning of the year. RTGS risk diversification. turnover was RMB 22 trillion in April 2020, down by 25.2% MoM. As of April 2019, dim In Q1 2020, Bond Connect averaged 197 sum bond issuance amounted to RMB 43.0 trading tickets per day, with average daily billion (including RMB 40 billion of central turnover of RMB 19.3 billion. In April, trading bank bills). and settlement services broadened to support Bond Connect investors to tap the According to a SWIFT report in March 2020, defaulted bond market in China. Bond the RMB is the fifth most active currency for Connect Company Limited put in place a domestic and international payments by guidebook, providing step-by-step guidance value, with a share of 1.85%, behind USD, for participation. EUR, GBP and JPY. RMB payments value increased by 21.5% MoM, while in general all . 2 Offshore RMB Express Market Review In April, trading tickets totaled 3935 for the scheme welcomed its first investor from month, while the trading volume and average Finland, along with 65 new investors, and daily turnover reached RMB 319.4 billion and expanded its coverage to 32 jurisdictions RMB 15.2 billion respectively. Policy bank across the globe with 1,883 global bonds, Chinese government bonds and institutional investors, including 70 of the top NCDs drew the most interests, accounting 100 global asset management companies. for 51%, 30% and 15% of the monthly trading volume. In the same month, the Offshore RMB Express 3 Policy and Peers Updates PBOC & SAFE Removed QFII / RQFII Investment Quotas and Promoted Further Opening-up of China's Financial Market In order to implement the deployment of the central government on further opening up China’s financial market, the People’s Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE) issued the Regulations on Funds of Securities and Futures Investment by Foreign Institutional Investors (PBoC & SAFE Announcement〔2020〕No. 2, hereinafter referred to as the Regulations), to standardize and simplify administrative requirements on the remittance and repatriation of funds as well as currency exchanges by foreign institutional investors, aiming to better facilitate foreign investors’ participation in China’s financial market. The key points of the Regulations are as follows. Firstly, restrictions on investment quota of Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (hereinafter referred to as Qualified Investors) are removed. Qualified Investors will no longer need to apply for any investment quota from SAFE. Instead, they shall entrust their main custodians to make a registration with SAFE. Secondly, Qualified Investors may freely choose the currency and timing of their inward remittance. Thirdly, the procedures for Qualified Investors’ repatriation of securities investment income are significantly simplified, replacing special audit report on investment returns issued by a Chinese certified public accountant and tax clearance or tax filing certificates with Tax Commitment Letters signed by Qualified Investors. Fourthly, the limits on the number of custodians are scrapped. A single Qualified Investor may choose multiple domestic custodians, and appoint one custodian as the main custodian. Fifthly, foreign exchange risk and investment risk management mechanism for Qualified Investors' domestic securities investment are further improved. Lastly, PBoC and SAFE will strengthen on- going and ex-post supervision. 4 Offshore RMB Express Policy and Peers Updates Yunnan cross border RMB settlements recorded a YoY growth of 12.8% in Q1 According to the PBoC’s Kunming branch, in the first quarter of 2020, cross-border RMB receipts and payments in Yunnan Province reached 12.8 billion yuan, a year-on-year growth of 12.8%. Renminbi is the second largest cross-border settlement currency in Yunnan after the US dollar, accounting for 32.5% of total cross-border receipts and payments in the first quarter. Since 2010, Yunnan Province has become the second pilot region in China to carry out cross-border RMB settlement, and cross-border RMB business has developed rapidly. By the end of 2019, its cross-border RMB settlement had reached 522.286 billion yuan. China unveiled guideline on improving market-based allocation of production factors On April 9th, the Communist Party of China Central Committee and the State Council issued a guideline on improving the market-based allocation mechanism of production factors in a bid to further facilitate the free and orderly flow of factors and stimulate market vitality. According to the document, China will expedite the development of the bond market through a variety of measures, including, but not limited to, enlarging its scale and enriching the bond varieties, and promoting the connectivity with offshore bond markets. The information disclosure standards for corporate credit bond will be unified and the bond default settlement mechanism will be improved. Exploration for a registration-based issuance system for corporate bonds will be put on the agenda. China will strengthen the unified access management of credit rating agencies to the bond market to build up the industry's benign development. Offshore RMB Express 5 Special Topics Implementation of Currency Swap Agreements between the Fed and Counterparts, and Considerations for Supporting International Liquidity through RMB Swap Lines Ying Jian, Senior Economist The wide use of USD across the globe has led to rapid development of international financial market, but may also lead to a global liquidity crisis.