the renminbi insider | rebuilding after the storm after the... · the renminbi insider gr11nv | 21...
Post on 26-May-2020
9 Views
Preview:
TRANSCRIPT
l Global Research l
Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2011 research.standardchartered.com
Contents
Focus – Becoming the world‟s currency 2
CNH market development – Rebuilding after
the storm 8
FX – Our new CNY and CNH forecasts 12
Credit – Value in Dim Sum bonds 16
Economics – The meaning of micro-loosening 22
Appendix 27
Trade-weighted CNY NEER above its
June 2010 post-de-peg level
Sources: Bloomberg, Standard Chartered Bank
105
110
115
120
Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
CNY NEER -Our daily estimate
BIS CNY NEER -Monthly
Key strategies
Now Target Stop-loss
Credit
Buy EVERRE 2014 synthetic CNY outright
80.3 100 70
FX
Corporates with future USD receivables/ CNY payables should hedge in USD-CNH forwards
Eddie Cheung, +852 3983 8566
Eddie.Cheung@sc.com
Kelvin Lau, +852 3983 8565
Kelvin.KH.Lau@sc.com
Robert Minikin, +852 3983 8567
Robert.Minikin@sc.com
Shankar Narayanaswamy, +65 6596 8249
Shankar.Narayanaswamy@sc.com
Stephen Green, +852 3983 8556
Stephen.Green@sc.com
Vijay Chander, +852 3983 8569
Vijay.Chander@sc.com
The Renminbi Insider | 09:00 GMT 21 November 2011
Rebuilding after the storm
Highlights
Global market volatility finally hit the offshore Renminbi market in late September.
CNH depreciated sharply, Dim Sum credit sold off, and participants were left
wondering how viable the CNH market was. The exhaustion of the conversion
quota for CNY trade exacerbated the volatility. The quota has been increased, but
corporates are reconsidering decisions to convert trade to CNY. We propose
mini-reforms to rebuild confidence, including the elimination of the quota.
We report on the continuing debate in Beijing on CNY internationalisation. Critics
argue that the resulting faster build-up of FX reserves and the potential for more
„hot money‟ flows are significant downsides. Some at the People‟s Bank of China
appear to view the market as a means of pushing through needed financial
reforms onshore.
We have adjusted our CNY and CNH FX forecasts for 2012, although we still
expect Beijing to allow gradual appreciation against the dollar. We now forecast
that the CNY will appreciate only 3.3% in 2012, to 6.12 at year end, following a
4.5% move in 2011.
We see value in the Dim Sum bond market after the sell-off in September and
October. We recommend the MCD 13 denominated in CNH, which has widened
substantially. The RESOUR 15 in USD clearly offers value compared to the
RESOUR 15 in CNH, both on an outright and an asset-swapped basis.
Monetary policy is becoming looser, gradually. In the run up to Chinese New Year
(Jan 23), liquidity conditions will be volatile but we do expect a required reserve
ratio cut before the CNY holiday. Interbank rates will be lower after that.
The Renminbi Insider
GR11NV | 21 November 2011 2
Focus – Becoming the world’s currency
Reserve currency hopes for the CNY face enormous challenges
We do not understand all the fuss about the SDR
CNH may help domestic reforms, but it is unclear exactly how
Big hopes are being pinned on the Chinese yuan (CNY). Some analysts, both in
China and overseas, believe that it stands a good chance of becoming a reserve
currency. This will take time, but many are impatient, believing that the world
desperately needs a new reserve currency as long-term fiscal decline in the US and
Europe undermines „old world‟ currencies.
On the other side of the debate, some in Beijing worry that the internationalisation of
the CNY will contribute to the fall of China‟s economy. They are worried by the „hot
money‟ that could flood in and out of the country through holes in the capital account
that the CNH market has created.
We recently participated in a conference in Beijing at which policy makers and
academics discussed these questions and more. The discussion ranged from the
problem of cross-border arbitrage flows to the need for wholesale reform of the
international financial system. Here, we report on the discussion and add some views
of our own.
Reforming the international financial system in the morning
Let us start with the big picture. Many at the event expressed considerable disquiet
about the dollar-based international financial system. This concern is not just heard in
Beijing. Many seminar participants argued that the dollar‟s status as the main global
reserve currency was being undermined by the US‟ fiscal position and monetary
policy. Most participants agreed that the Triffin Dilemma – the ability of a reserve
currency to raise unlimited external debt, which eventually dooms its government to
becoming too indebted – was at the root of the dollar‟s current difficulties. US
household savings rates might have adjusted upward in the last two years, but the
increase in the government‟s net borrowing more than makes up for this.
Chart 1: Our estimates of China’s reserve holdings of US securities
USD bn
Sources: Bloomberg, Standard Chartered Research
0
500
1,000
1,500
2,000
2,500
Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11
Total US securities holdings (TIC reported)
Total UST holdings (TIC reported)
Total UST holdings (adding London)
Total US securities holdings (adding London)
Stephen Green, +852 3983 8556
Stephen.Green@sc.com
Ambitions for the CNY are big and
small – and are hotly debated even
in China
The international financial system is
not working, but neither would the
alternatives
The Renminbi Insider
GR11NV | 21 November 2011 3
Washington‟s „Weak Dollar‟ policy also complicates policy making in the current „two-
speed‟ global economy, it was argued. If the US implements QE3 (as we expect it to in
early 2012), and possibly QE4 and QE5 later, some believe the resulting global inflation
would make life very difficult for still-growing emerging markets. Policy makers there
are left facing a volatile world: one day they worry about a deflationary collapse in
global demand, the next, an inflationary spiral fed by the printing of US dollars (and
possibly euros too). Some participants argued that there was a fatal contradiction
between the domestic needs of the US economy and its global responsibilities. Another
noted that issuing a reserve currency was not a privilege but an “exorbitant curse”.
As an aside, Lawrence Summers, then President Obama‟s chief economic advisor,
made the point at a Standard Chartered event in Hong Kong earlier this year that
there is nothing to stop EM countries from appreciating their currencies if they are
worried about importing inflation. And as Paul Krugman likes to say, no one forced
EM central banks to buy so much US debt. We show China‟s holdings of US
government debt in Chart 1.
So what to do? The answer is tricky because at least two things are required from
any alternative to the current global system:
The countries that print reserve currencies need to exercise restraint in the good
times in order to prevent inflation.
When faced with a liquidity crisis, reserve currency issuers need to be able to act
as lenders of last resort.
In other words, a reserve currency needs to behave very differently at different times.
The gold standard, for instance, is respected for fulfilling the first requirement but
utterly fails on the second.
At least two participants at the Beijing conference argued that consideration should
be given to an international reserve currency, as originally foreseen by John Maynard
Keynes in the 1940s. Two years ago, People‟s Bank of China (PBoC) Governor Zhou
Xiaochuan wrote about the possibility of reinventing the IMF‟s Special Drawing
Rights (SDR) as an international currency. The SDR is currently just a basket of
national currencies, and is only used as a unit of account when members contribute
funds to the IMF. This is a far cry from Keynes‟ idea of a truly global currency backed,
in effect, by a global central bank.
However, the practical difficulties of remaking the SDR are probably overwhelming. A
revived SDR would require sovereign governments and their central banks to give up
their independence, and an international central bank (a reinvented IMF?) to be able
to print money. This would require the bank to have revenue-raising ability.
Even if this was practical, one participant pointed out that the euro area – an alliance
of close neighbours – was having more than a few problems agreeing on how to run
its central bank. Asking countries with even more divergent interests to run a global
central bank would be asking for trouble, he argued.
So, frustration with the current system is met with the impossibility of radical change.
As far as the SDR goes, the CNY could perhaps be welcomed into the SDR basket in
a few years‟ time. IMF rules require that SDR basket currencies be fully convertible –
a reasonable requirement, since they are supposed to be easily used in a crisis. But
Reviving – and writing off – the SDR
The Renminbi Insider
GR11NV | 21 November 2011 4
even the CNY‟s entry into the SDR basket would amount to little more than a
diplomatic victory for Beijing, in our view.
A more practical alternative, which was widely discussed, would be a „multi-reserve-
currency‟ world. Barry Eichengreen, author of Exorbitant Privilege, a book on the rise
of the dollar, foresees such a world; on the face of it, this vision looks reasonable to
us. One conference speaker argued that it was time for large EMs to provide an
alternative to the dollar. In a multi-reserve-currency world, the hope is that
competition to attract investors would impose some discipline on sovereign
borrowers. Moreover, EMs still want to accumulate FX reserves to protect
themselves in the event of a financial crisis, and many hope to diversify their risks
away from the USD and the EUR. In such a context, the speaker argued that China‟s
internationalisation of the Renminbi was a global public good.
There are some problems with this argument, though. For starters, we already live in
a multi-reserve-currency world, and this has not prevented the issuers of these
currencies – the US, the euro area, the UK and Japan – from facing fiscal problems
and implementing loose monetary policy. We also note that China‟s own households
appear to lack confidence in the Renminbi as a store of value. They seem to put far
more faith in the country‟s residential housing stock. Chart 2 shows M2 growth in the
major economies. Even though China‟s printing of money has slowed, its M2 growth
was still worryingly high in 2009 and 2010. The amount of money (M2) in China today
has doubled since the same time in 2008. As we have pointed out before, China‟s
hopes for reserve currency status ultimately hinge on it having deeper capital
markets, an independent central bank, and a freer capital account.
There is clearly no easy solution to the troubles of the international financial system –
and as we prepare for more QE in the US and Europe, flows will become more
volatile. A radical change in the current international monetary system is unlikely, and
ultimately we will continue to have to rely upon central banks to act responsibly.
The CNY Special Economic Zone
The pros and cons for China of Renminbi internationalisation were a hotly debated
topic at the conference. (We note that PBoC officials prefer to talk about „cross-
border CNY settlement‟, but since a CNH market is now developing in Hong Kong,
this description seems a little tame.)
Chart 2: M2 growth is still fastest in China, thanks to credit expansion (% y/y)
Sources: Bloomberg, Standard Chartered Research
Europe
Japan
China
US
-5
0
5
10
15
20
25
30
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
A world with multiple reserve
currencies is hardly a better
alternative
The pros and cons of pushing the
CNY offshore
The Renminbi Insider
GR11NV | 21 November 2011 5
For good or for bad, depending on one‟s perspective, China did not take the orthodox
advice that one should liberalise interest rates and remove capital account controls
before internationalising one‟s currency. Indeed, China may be the only example of a
government freely pushing the internationalisation of its currency while maintaining
capital controls.
Some seminar participants attempted to defend this approach with claims that China
always succeeded in carrying out reforms in its „own way‟. Other participants wanted
to understand the real costs and benefits of such an approach.
On the benefits side, PBoC officials claimed that CNY internationalisation was
demanded by the corporate sector – trading firms and companies investing overseas
wanted to reduce their FX risk. Long-term, China would enjoy clear advantages from
being able to issue a reserve currency (including seignorage, the ability to print
currency and push the cost of the resulting inflation onto others), but economists
debate the scale of these benefits. One participant noted that reserve currencies tend
to benefit from inflows of liquidity when a crisis hits. This benefit can be significant –
witness how US government bond yields have been held down despite market
concerns about the US fiscal position. China‟s leaders had taken note of this
phenomenon, the participant claimed.
The CNY internationalisation policy also has downsides for China. Most participants
agreed that internationalisation requires full opening of the capital account. One
concern is that global capital will then arbitrage differences between the on- and
offshore markets. One paper presented at the conference detailed how the offshore
CNY market is being successfully kept separate from the onshore market, at least for
now. The same government bonds maturing in early 2015 yield 1.9% offshore and
3.46% onshore, which suggests that capital controls are working to some extent. But
they are leaky, and indirect arbitraging is possible.
Another frequently mentioned downside of CNY internationalisation is increased FX
reserve accumulation by the PBoC. When importers buy USD offshore rather than
onshore, more onshore dollars have to be sucked up by the central bank. Importers
were motivated to do this in H1-2011 thanks to the CNH premium onshore. In recent
Chart 3: China’s build-up of FX reserves – watch the ‘everything else’ category
USD bn
Sources: CEIC, Standard Chartered Research
-200
-150
-100
-50
0
50
100
150
200
250
Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011
Trade (BoP) Net FDI Returns Everything else
China accumulated another USD
84bn of FX reserves in the first
three quarters of 2011
The Renminbi Insider
GR11NV | 21 November 2011 6
weeks, with the CNH now in discount, exporters have had an incentive to receive
CNH rather than USD offshore. This has resulted in a reversal of USD selling in
China, relieving pressure on the PBoC in Q3, as Chart 3 shows. We estimate that the
increase in FX reserves related to trade in CNH in the first three quarters of 2011
was about USD 83bn, some 27% of total FX reserve accumulation during the period.
Another conference participant argued that there is no fundamental demand for CNY
offshore at present – everyone just wants to hold an appreciating currency, and once
expectations shift, the „internationalisation‟ process will reverse. He saw only
speculative motives on the part of importers to invoice trade in CNY in H1, and for
owners of CNH assets.
We suspect that this view is a little too sceptical. Exporters receive real benefits from
converting to CNY invoicing – most importantly, quicker payment. This is because
payments in CNY from overseas do not need to be kept in a verification settlement
account for 10 days, as foreign-currency payments do; administrative costs can be
saved as well. Such savings can be passed on to buyers.
Moreover, if China‟s economy continues to grow, relative productivity differentials
should result in continuing appreciation pressure on the real effective exchange rate.
In such an environment, the incentive to hold CNY should not vanish. The PBoC only
needs use of the CNY as an invoicing currency to reach critical mass at some point
in order for the CNY to become a normal currency for trade and investment, and its
job will have been done. (But as we note in the CNH market development part of The
Renminbi Insider, the regulators still have some work to do.)
An exceptionally cunning plan?
Given the even balance between the economic pros and cons, some conference
participants wondered if there might be something else behind Beijing‟s push for
CNY internationalisation. According to one theory, CNY internationalisation is a
means of pushing domestic reform. The broad idea here is that, rather like its entry
into the WTO, China‟s gradual integration with global financial markets will induce
positive domestic change.
The explanation is elegant, but how could it work in practice? We can think of a few
possible mechanisms:
Once reserve-currency status is agreed as a top political priority, the leadership
will have to consider the need for deeper capital markets, and perhaps even
greater independence for the central bank.
A successful and relatively free CNH capital market in Hong Kong will induce
Shanghai and other cities to lobby for financial-sector liberalisation back home.
A controlled experiment offshore can demonstrate that a freer financial market
does not have to be destabilising, and thus win the confidence of senior leaders.
China‟s financial institutions and corporate sector will get used to the freer CNH
market and will also lobby for liberalisation onshore.
Regulators can learn how to regulate complex CNH instruments from the Hong
Kong markets.
People hold CNH because of
appreciation expectations – so what
happens when those expectations
reverse?
Do the reformers have a cunning
plan?
The Renminbi Insider
GR11NV | 21 November 2011 7
If this is indeed the thinking, we have two things to say. First, it is a long-range plan
that lacks the rule-based structure the WTO provided, so it is difficult to see how it
will develop. Second, we cannot help but think about the potential downsides. For
instance:
Opening up the capital account might make domestic interest rate reform –
which implies higher interest rates – more, not less, difficult. (We discussed how
rate reform should and could work in the last issue of The Renminbi Insider.)
The disjointed CNY/CNH market could create incentives for arbitrage activities,
which would undermine the credibility of the experiment.
Holes in the capital account could introduce more volatility to the macro-
economy.
All the time and effort put into CNY internationalisation reforms may divert from
policy makers from the serious tasks of allowing more interest and exchange
rate flexibility.
There are potential downsides to
this strategy too
The Renminbi Insider
GR11NV | 21 November 2011 8
CNH market development – Rebuilding after the
storm
The recent bout of CNH volatility has shaken the market
The expanded trade conversion quota needs to be reformed
We also believe the administrative burden for CNY settlement is now
too high
The offshore CNY (CNH) market was finally hit by global market turbulence in late
September, and Dim Sum bonds and CNH were sold off along with the rest of the
Asian FX and credit universes.
This is clearly a setback for the market. As a result, momentum has been lost on the
CNY trade settlement and Dim Sum bond market fronts. The presumption that CNH
should always trade at a stable premium to onshore CNY, which anchored many
investors‟ interest in the market, disappeared. But Beijing appears intent on
continuing to support the market. We believe the speedy formalisation of the CNH
FDI rules illustrated this. Moreover, the People‟s Bank of China has announced its
aim of making the Renminbi the world‟s third-largest trade currency (surpassing the
Japanese yen) within three to five years. It is also important to note that CNH did not
sell off as much as some other Asian currencies, and even at the worst of times, it
remained within 3% of the onshore CNY.
The onus is now on the regulators in Hong Kong and Beijing to respond proactively,
as they have done in the past, to strengthen the market further. Specifically, the CNY
trade settlement conversion quota system did not work well during the recent
volatility, as it was unable to respond to fast-changing market conditions. The
renewal and expansion of the quota for Q4, while a good start, is not a permanent
solution. The recent clarification of which trades are eligible to tap this quota is
welcome, but does little to reduce the system‟s inherent complexity and
documentation requirements. Worries about another exhaustion of the quota will
keep CNH market participants cautious, and could cause corporates to reconsider
plans to convert their invoicing to CNY. In addition, CNY appreciation expectations
are weakening, which will reduce interest in the CNH market.
Table 1: CNH settlement to Q3-2011 (CNY bn)
Item Q3-2011 Q2-2011 q/q (%)
Cumulative
Cross-border Renminbi trade settlement (since beginning of pilot scheme)
2,050.7 1,467.3 + 39.8%
Renminbi overseas direct investment (Q1-2011 onwards)
10.9 5.4 + 101.9%
Quarterly
Cross-border Renminbi trade settlement 583.4 597.3 - 2.3%
w/w merchandise goods trade 396.9 455.7 - 13.0%
services trade 186.5 141.6 + 31.7%
% of China trade 10.0% 10.1% ---
Cross-border Renminbi remittances 419.6 409.0 + 2.6%
w/w inward remittances (China IRTT) 156.9 103.8 + 51.2%
outward remittances (China ORTT) 262.7 305.2 - 13.9%
IRTT:ORTT ratio 1 : 1.7 1 : 2.9 ---
Sources: PBoC, Standard Chartered Research
Kelvin Lau, +852 3983 8565
Kelvin.KH.Lau@sc.com
Stephen Green, +852 3983 8556
Stephen.Green@sc.com
CNH market development has
slowed, but the regulators could
restore confidence
The Renminbi Insider
GR11NV | 21 November 2011 9
Here, we quickly review CNH trade settlement progress in Q3, and then outline the
problems exposed by the recent market volatility. We suggest a mini-reform that
would help prevent a repeat of the September mess.
CNY settlement update
Q3-2011 saw the first q/q decline in the amount of CNY cross-border trade
settlement, to CNY 583bn from CNY 597bn in Q2, as Table 1 shows. About 10% of
China‟s trade is currently denominated in Renminbi. Services now account for almost
one-third of this settlement volume.
There was a small increase in Renminbi remittances in Q3, along with more evidence
of rebalancing – the ratio of exports (inward payments of CNH) against imports
(outward payments of CNH) was 1.0:1.7 in Q3, down from 1.0:2.9 in Q2. Partly as a
result, the total amount of CNH deposits in Hong Kong has basically stabilised over the
last couple of months. By end-September, Hong Kong had CNH 622bn of CNH
deposits.
The trade conversion quota is bigger but not big enough
All of Asia suffered from heightened bearish sentiment in late September. Making
matters worse for the CNH market, just after the CNH discount emerged, the clearing
bank‟s CNY trade settlement conversion quota was exhausted. This quota limits the
clearing bank‟s commitment to allow banks participating in the trade settlement
scheme – after they net out eligible trade-related conversion needs from their clients
– to square the resulting net CNY positions with the clearing bank. Such trades are
done at the onshore CNY price (the alternative is to trade at the offshore CNH price,
at which everyone who is not involved in CNY trade settlement deals). A similar
quota system is in place between offshore banks and so-called onshore agent banks.
As soon as CNH moved into discount against the CNY, corporations with conversion
needs underlined by genuine trades rushed to move their transactions through the
settlement bank. The onslaught of one-sided flows quickly exhausted the CNY 4bn
quota. Once the quota was used up, flows moved back into the CNH market, further
weakening the currency. (Trade-related CNY cross-border remittances were
unaffected because the quota only applies to offshore conversion, not cross-border
payments.) As Chart 1 shows, CNH moved aggressively against CNY.
Chart 1: The CNH premium suddenly disappeared and is now coming back
Sources: Bloomberg, Standard Chartered Research
USD-CNY
USD-CNH
0.0
0.2
0.4
0.6
0.8
1.0
1.2
6.30
6.35
6.40
6.45
6.50
6.55
Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11
The exhaustion of the trade
conversion quota was a big
problem for the market
The Renminbi Insider
GR11NV | 21 November 2011 10
In early October, the quota was renewed and increased to CNY 8bn for Q4-2011,
from CNY 4bn for each of the first three quarters of the year. Quotas granted to
onshore agent banks enjoyed similar treatment. Some measure of calm has returned
to the market, but participants remain cautious.
Lingering fears put corporates off CNY settlement
There is still a sense that the quota might be exhausted again soon. This is not
inconceivable given persistent global risk aversion. CNY letters of credit (L/Cs)
previously issued onshore and discounted offshore – which flourished in H1-2011
before winding down somewhat in Q3 – are likely to guarantee a constant stream of
Renminbi payments offshore in the coming months as the L/Cs come due. This
Renminbi will be eager to tap the clearing bank quota as long as the CNH spot
discount remains.
Under normal market circumstances, the ability of corporations to make trade-related
cross-border transfers to and from mainland China stabilises the CNH market. When
CNH trades „rich‟ to CNY onshore, mainland importers will buy more dollars via their
offshore subsidiaries, boosting offshore CNH liquidity and reducing the premium.
When CNH is in discount, mainland exporters will buy CNH offshore, pushing up
CNH. The clearing bank conversion channel (when it is open) stands behind the
market to guarantee that those conducting trade in CNY are protected.
In September, though, the quota system added to the market‟s volatility. The rush to
tap this supplementary conversion channel exacerbated one-sided flows, quickly
rendering the quota‟s „netting off‟ mechanism ineffective.
As long as the quota is smaller than cross-border trade flows (about CNY 200bn in
September), the risk of quota exhaustion will continue to loom. The very fact that the
offshore market can diverge from the onshore market by 3% means that access to
the onshore market FX rate can be closed during volatile periods – a huge
disincentive for big corporates to invoice in CNY. A 3% loss on a large trade flow is a
significant amount of dollars. Large firms need to be assured that they can access
the onshore rate from offshore before they move to CNY invoicing.
At the very least, a bigger settlement quota is needed. We also believe the quota
system should become simpler and more transparent. One could go further and
argue that there is no real need for a finite quota, as long as there are water-tight
rules to ensure that all of the flows tapping the conversion quota are backed by
genuine trade. Removing the quota while insisting that third-party trade documents
are in place (enforced by spot checks with large penalties in the event of
misbehaviour) would be a good way of solving the problem, we believe.
We believe such spot-checks would be preferable to the recent move by the Hong
Kong authorities to require documentation of each FX trade done under the trade
settlement quota. These new rules have raised issues for corporates involved in the
scheme and for those looking to reconvert into CNY. The feedback is that such
documentation requirements are burdensome and are causing some to reconsider
their involvement in the scheme, or to look at other offshore centres than Hong Kong.
Fears that the quota could be
exhausted again are deterring
companies from converting trade
settlement to CNY, we believe
We believe the quota either needs
to be increased a lot, or it needs to
be removed completely
The Renminbi Insider
GR11NV | 21 November 2011 11
Enlarging or even removing the trade settlement quota, as well as fine-tuning
documentation requirements, would set up the CNY settlement scheme to grow
again. Without such changes, we believe fewer corporates will convert into CNY and
the overall CNH market will grow more slowly. If the Renminbi is indeed to become
the world‟s third most popular trade currency, there is some rebuilding to be done
after the recent storm.
The Renminbi Insider
GR11NV | 21 November 2011 12
FX – Our new CNY and CNH forecasts
We scale back our forecasts for CNY gains on trade, inflation outlook
CNY gains may slow in Q1 before re-accelerating later in 2012
CNH premium over CNY is likely to be restored in early 2012
Corporates should use CNH to hedge future onshore CNY payables
H1-2012 looks set to bring a significant slowdown in the pace of CNY appreciation
versus the US dollar from the 5.5% annual pace that has prevailed since the mid-
June 2010 de-peg. While the case for a marked slowdown is broad-based, it is
dominated by prospects for China‟s balance of payments and inflation dynamics.
Current account: We forecast a current account surplus of 2.3% of GDP in 2012,
down from 3.6% in 2011. In 2011, China‟s trade balance was basically flat in Q1 (a
deficit of USD 0.71bn), and the monthly surplus did not exceed USD 20bn until June.
Given weak external demand, H1-2012 should look similar, though much will depend
on imports, which will likely be weaker than in H1-2011. Q3-2011 balance-of-
payments data pointed to a pick-up in foreign companies remitting profits offshore. If
this trend continues, alongside weaker FDI inflows within the capital account, CNY
appreciation pressures will dissipate. In late September 2011, a ramp-up of
remittances (along with the disruption of the CNH market) pushed up onshore USD-
CNY, despite lower fixes, as Chart 2 shows.
Inflation: The desire to contain imported inflationary pressures reinforces the case
for CNY appreciation onshore. Commodity prices have retreated, and the broader
domestic inflation picture is now much more benign – we expect headline inflation to
have eased to 4.5% by end-2011 and to fall significantly further over the course of
H1-2012.
The geopolitical aspect of the USD-CNY path is the most difficult to call. The
European sovereign debt crisis and China‟s potential role in providing Europe with
loans for the European Financial Stability Facility reinforce its ability to shrug off
international pressure for CNY appreciation. However, US (and IMF) criticism of the
slow pace of CNY appreciation has not abated, and potential Congressional approval
of the US currency manipulation bill will limit China‟s room for manoeuvre. The
Chart 1: USD-CNY and annualised pace of CNY
appreciation (versus USD) since de-peg
Chart 2: USD-CNY daily close vs. PBoC daily fix – daily
and 5-day MA (%)
Sources: Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
0%
3%
6%
9%
6.3
6.4
6.5
6.6
6.7
6.8
6.9
Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11
USD-CNY
Annualised pace of appreciation (RHS) Daily 5-day MA
-0.4
-0.2
0.0
0.2
0.4
0.6
Jun-10 Oct-10 Feb-11 Jun-11 Oct-11
Weak side of USD-CNY daily trading band
Robert Minikin, +852 3983 8567
Robert.Minikin@sc.com
Eddie Cheung, +852 3983 8566
Eddie.Cheung@sc.com
A significant slowdown in CNY
gains is expected amid persistent
trade deficits in H1-2012 and an
extended downswing in headline
inflation
Broader geopolitical arguments still
favour CNY gains versus the USD,
however mild
The Renminbi Insider
GR11NV | 21 November 2011 13
balance of risks suggests that the CNY will be put on a gradual appreciation path
against the US dollar. The pace of appreciation will be fast enough to appease
overseas pressure, but not fast enough to damage China‟s exporters. We believe
that even if China‟s FX reserves decline mildly in H1, the CNY will not significantly
depreciate against the USD.
Our new CNY-USD forecasts scale back the CNY‟s quarterly gain in Q4-2011 to 0.97%
(compared to gains of 1.3% in Q2 and Q3-2011). We expect quarterly gains to slow
to just 0.64% in H1-2012. While recent declines in China‟s current account and trade
surpluses create greater uncertainty for the CNY‟s path further out, these trends have
been the product of a powerful investment boom. As this fades, the current account
surplus should stabilise and rebound, creating the conditions for persistent CNY
gains in the medium term. These will be reinforced by healthy domestic productivity
growth at home and sustained overseas demand for CNY as a financial asset.
The fate of the CNH premium
The powerful burst of risk aversion across global financial markets in August and
September reached a crescendo in late September and finally prompted a bout of
instability in CNH-denominated assets, including FX. The USD-CNH „general
purpose‟ rate in Hong Kong hit at least 6.56 intraday on 23 September, and there
were reports of scattered trades in the mid-6.60s (putting CNH at a discount of close
to 4% to CNY). While it is unclear whether disorderly market conditions sparked
official intervention, heavy USD-CNH selling by the clearing bank (and other
mainland China names) played a role in stabilising the market.
In our view, the marked CNH discount in September 2011 had the same significance
as the marked CNH premium in October 2010. It primarily reflected short-term
Table 1: USD-CNY and USD-CNH forecasts (end-period)
Table 2: Q4-2011 Q1-2012 Q2-2012 Q3-2012 Q4-2012 Q1-2013 2012 2013
USD-CNY 6.33 6.29 6.25 6.19 6.13 6.08 6.13 5.98
CNY (% q/q) 0.97 0.64 0.64 0.97 0.98 0.82 3.26 3.46
USD-CNH 6.34 6.275 6.235 6.175 6.115 6.065 6.115 5.965
CNH premium (%) -0.16 0.24 0.24 0.24 0.24 0.24 0.24 0.24
Source: Standard Chartered Research
Chart 3: USD-CNY, USD-CNH and CNH premium over
onshore USD-CNY (%)
Chart 4: CNH premium to CNY – Distribution by % of daily
observations since start of August 2010, by 0.5ppt gaps
Sources: Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
USD-CNY
USD-CNH
CNH Premium (RHS)
-3%
-2%
-1%
0%
1%
2%
3%
6.3
6.4
6.5
6.6
6.7
Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11
0
10
20
30
40
50
60
3.0%2.5%2.0%1.5%1.0%0.5%0.0%-0.5%-1.0%-1.5%-2.0%
0.5% interval to:
0 to 0.5%
Gradual CNY gains are likely to
extend into the medium term
Global market turmoil prompted
powerful intraday surge in the CNH
discount to CNY
The Renminbi Insider
GR11NV | 21 November 2011 14
market illiquidity, rather than a sustained disruption to the mechanism of the offshore
market (or, indeed, the CNY trade settlement scheme). With CNY in Hong trading at
a discount to CNY in the onshore market, corporates with CNY payables have an
economic incentive to acquire CNY offshore and then make the cross-border transfer
into mainland China. This mops up the excess CNY offshore, bringing demand and
supply back into equilibrium. Banks‟ ability to arbitrage the onshore and offshore
CNY, alongside investors‟ willingness to invest in cheap CNH-denominated assets,
limits the extent of the CNH discount, even in the short term.
While the broader dynamic points towards CNH and CNY convergence, a couple of
factors suggest more market instability in the future. First, as we discuss elsewhere
in this issue of The Renminbi Insider, the possibility that the trade settlement quota
could run out again creates profound uncertainty over the USD-CNH market. Second,
and related to this point, banks have provided USD financing for exporters to China
(from Hong Kong) based on letters of credit (L/Cs) on the assumption that CNH
would be trading at a premium to the onshore CNY at the maturity of those L/Cs. At
some point, the L/Cs will mature, creating a lot of USD demand – which could quickly
use up the quota.
Our forecast profile incorporates a modest CNH discount into end-2011. The global
slowdown overshadows prospects for Asia ex-Japan currencies on this horizon, and
may also reduce appetite for CNH-denominated assets more generally. Next year,
we expect a modest CNH premium to re-emerge; it should stabilise at around 150
pips (0.24%). If onshore and offshore CNY were perfectly fungible, USD-CNY and
USD-CNH would simply converge. But in the current context of limited fungibility, the
positive carry in CNH-denominated assets, combined with expectations of persistent
CNY appreciation, justifies a very modest CNH premium.
Value in the CNY and CNH forward space
While volatile CNH pricing has made for tricky market conditions for investors, it has
been positive for corporate participants in the CNH market. Overseas investors and
corporations play markedly different roles in the offshore market. Overseas investors
holding CNH-denominated assets have exposure to the „general purpose‟ USD-CNH
spot rate. Their investment returns are driven unambiguously by the performance of
CNH. Corporates with onshore CNY payables, in contrast, have the opportunity to
Chart 5: USD-CNH curve has reshaped in past 2 months
USD-CNH forward curve is progressively more upward-
sloping
Chart 6: 1Y CNY appreciation discounted by USD-CNH
and USD-CNY non-deliverable 1Y forwards
Source: Bloomberg Sources: Bloomberg, Reuters, Standard Chartered Research
6.2
6.3
6.4
6.5
6.6
0.00 0.25 0.50 0.75 1.00
Years forward
15 Nov
3 Oct
15 Sep
-2%
-1%
0%
1%
2%
3%
4%
5%
Sep-10 Dec-10 Mar-11 Jun-11 Sep-11
USD-CNY 1Y forward appreciation vs. spot
USD-CNH 1Y forward appreciation vs. spot
Unpriced CNY appreciation
The CNH premium to CNY should
re-emerge in 2012
The Renminbi Insider
GR11NV | 21 November 2011 15
buy CNY in the offshore market and have an economic exposure to onshore USD-
CNY. Corporates should add to CNY cash balances in the offshore market when
CNH trades at a significant discount to CNY, as they will be able to use these funds
to make future onshore CNY payables.
The recent market volatility has also played a role in cheapening the CNY forwards in
both offshore markets – the USD-CNY non-deliverable forwards and the USD-CNH
deliverable forwards. In the deliverable context, the USD-CNH curve has typically
moved up and down in a broadly parallel fashion, creating periodic opportunities to
sell USD-CNH forward well above our forecast profile for USD-CNY. In early October,
for example, the 1Y USD-CNH forward stood at 6.4590, 4.3% above our revised
forecast for end-Q3 2012. Even as the CNH discount has dwindled, the USD-CNH
forward curve has become markedly upward-sloping (the 1Y forward pips are around
310 pips), supporting the USD bid in the forwards. Both the deliverable forward and
non-deliverable forward curves still significantly under-price prospective CNY gains
relative to our forecasts (see Chart 6), even after our revisions.
Non-deliverable USD-CNY and
deliverable USD-CNH forwards
significantly under-price
prospective CNY appreciation
The Renminbi Insider
GR11NV | 21 November 2011 16
Credit – Value in Dim Sum bonds
Changing currency dynamics have taken a toll on Dim Sum bonds
CNH volatility and widening credit spreads dampen enthusiasm
CNH bonds have underperformed counterparts in the USD space
CNH dislocations create relative-value opportunities
Returns trump volatility
Given all the recent market volatility, do Dim Sum bonds still offer value relative to
their USD counterparts?
Earlier this year, expectations of strong appreciation in both the onshore and offshore
Chinese yuan (CNY), coupled with ample liquidity, drove large inflows to Dim Sum
bonds. As a consequence, year-to-date Dim Sum issuance crossed the CNH 175bn
(USD 26.9bn) mark, and the CNH deposit base had expanded to CNH 622bn as of
end-September (the latest date for which data is available). The total volume of CNH
bonds outstanding – at CNH 190bn – could be comfortably absorbed by the total
deposit base, as Chart 1 shows. Deposits typically earn a negligible interest rate of
around 0.5%, and Dim Sum bonds were therefore seen as offering better value.
But everything changed in early September 2011, when the sharp global market sell-
off adversely impacted the CNH market, causing liquidity to flee. As a result, even the
highest-rated issues from China‟s government are now quoted below par. Lower-
rated high-grade (HG) paper (including from non-Chinese international issuers) and
high-yield (HY) paper (primarily from Chinese property developers) has fallen
considerably more in price and percentage terms. This correction was driven by:
1. Increased global risk aversion with the worsening of the euro-area sovereign
debt situation
2. China-specific issues related to tighter liquidity, fears of bad bank loans, and a
property bubble (the latter led to particular stress on developers‟ credit)
1. Chart 1: CNH deposits dwarf CNH bonds outstanding
CNH deposits and bonds outstanding (CNH bn)
Sources: Bloomberg, Standard Chartered Research
0
100
200
300
400
500
600
700
Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11
Demand and Savings Deposits Time Deposits Outstanding
Vijay Chander, +852 3983 8569
Vijay.Chander@sc.com
Shankar Narayanaswamy, +65 6596 8249
Shankar.Narayanaswamy@sc.com
The Renminbi Insider
GR11NV | 21 November 2011 17
3. Sudden liquidity pressures in the CNH market, which caused the CNH exchange
rate to turn sharply lower and trade at a steep discount to the onshore rate (this
was an Asia-wide trend, but it also had a China flavour)
Here we divide the CNH market into three categories and examine the impact of
spread widening on specific CNH issues in the HG and HY spaces. We focus in
particular on issuers that have both USD-denominated and CNH-denominated bond
issues with comparable tenors.
International issuers such as McDonald‟s, Volkswagen, Air Liquide. We believe
that CNH bonds offer value compared with the USD, either outright or on a
swapped basis (in some cases).
Local HG and quasi-sovereign names. CNH used to be expensive compared to
USD bonds (both on an unhedged and a swapped basis), but recent volatility in
spot CNH has resulted in a narrowing of the differentials on an outright
unhedged basis. That said, in general, USD bonds are still marginally cheaper.
In addition, the USD-CNH swap curve is now flattish to slightly upward-sloping
rather than inverted. Thus, on a swapped basis as well, USD bonds are now
cheaper than asset-swapped issues, since the yield pick-up on the swapped
paper has been reduced considerably.
Local HY, including the Chinese property sector. CNH bonds look expensive
given the much higher volatility in the USD space (especially in Chinese
property-sector credits), while the CNH space has been less volatile.
As a result, we argue that:
1. Among international issuers, investors should look at the MCD 13 in CNH, which
has widened quite substantially, while the MCD 13 in USD has been far less
volatile. As a result, the MCD in USD trades well inside the MCD Dim Sum bond.
2. In the HG space, the RESOUR 15 in USD clearly offers value compared to the
RESOUR 15 in CNH, both on an outright and an asset-swapped basis.
3. In the HY space, there has been a marked narrowing of spreads between the
CNH and equivalent USD issues from SHASHU and PWRLNG. USD paper from
SHASHU (but not PWRLNG) is still a touch wider in absolute yield terms.
Given our house view of further CNY gains over the next 12 months and the fact that
the CNH discount to CNY no longer exists (CNH and CNY have converged), we
expect CNH credits to resume their rally once markets stabilise, and to outperform
USD credits. On a positive note, there are tentative signs that the CNH currency
market is stabilising; as a consequence, credit spreads have tightened marginally
from their widest levels.
Overall market performance
Looking at total returns in aggregate, the benchmark HSBC Renminbi Total Return
Index is up 1.38% YTD in USD terms (as of 3 November, the last day for which data
for this index is publicly available). Returns from currency appreciation have totalled
2.973% since the beginning of the year (based on the end-2010 CNH exchange rate
of 6.58, versus the rate of 6.39 as of 3 November). The carry accruing from the
current average coupon on the index (2.72%) has totalled 2.288% YTD. Adverse
price movements in the individual credits that comprise the index account for the rest
of the move. With currency appreciation and total carry together accounting for
+5.008% of the move, losses on account of adverse price/credit movements have
While CNH returns have been
positive, this has been mostly
attributable to a combination of
positive carry and currency
appreciation
The Renminbi Insider
GR11NV | 21 November 2011 18
totalled 3.628% (given that total returns are only 1.38%). Clearly, the credit
component of the index has detracted from total returns.
Impact of the FX move
We expect the onshore CNY to appreciate further to 6.33 by year-end, up marginally
from current levels. We also expect the offshore CNH to rally marginally, to 6.34 by
end-2011 and 6.115 by end-2012. Thus, for investors with a time horizon out to
December 2012, returns from currency appreciation alone should contribute around
3.92% to total returns for the period. This is in contrast to the recent past, when
negative currency returns in the wake of offshore CNH volatility detracted from total
returns. With another 33.5bps of carry (at the index level) from 16 November through
year-end, plus a further 2.72% of carry in 2012, carry should contribute another 3.055%
to total returns through end-2012. Given our outlook for credit markets after the
recent widening, even assuming a relatively modest 50bps contraction in spreads
through end-2012, returns from spread compression should contribute 1.65% to total
returns between now and then (given the average portfolio duration of 2.93 years).
Thus, we expect a total index return of around 8.63% through end-2012. Favourable
selection of securities is likely to result in an even better performance.
The CNY has been appreciating at a steady pace of 5-6% a year versus the USD, as
Chart 2 shows. However, both the USD-CNH deliverable forwards and the NDFs (out
to 12M) have tended to underestimate the pace of CNY appreciation – they have
projected an appreciation range of 4.1-4.7%, while the actual pace of appreciation
has been somewhat faster. Our forecasts also project faster CNY appreciation than
is priced into the forwards over a period of one to two years.
In another interesting development, the USD-CNH swap curve, which used to be
downward-sloping (like the USD-CNY onshore curve, which is not accessible to
offshore investors), has changed shape and now trades quite flat (Chart 3). The
move in the USD-CNY NDF curve has been even more extreme, and it is now
modestly upward-sloping except at the shortest tenors. As a result, the yield pick-up
that investors would have previously received for swapping from CNH to USD has
not only disappeared but has turned negative. Changing expectations of CNH
appreciation and the recent market turmoil have contributed to this development.
Chart 2: CNY is appreciating at a steady pace
Annualised CNY appreciation (%) vs. actual CNY level
Chart 3: Impact of the swap curve
Both the CNH and USD-CNY NDF CCS curves are flat
Source: Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
USD-CNY
Annualised App. - RHS
5% Top
6% Bottom
0%
2%
4%
6%
8%
10%
6.3
6.4
6.5
6.6
6.7
6.8
6.9
Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11
USD-CNH
USD-CNY NDF
USD-CNY Onshore
6.31
6.33
6.35
6.37
6.39
6.41
0.00 0.50 1.00Years forward
The Renminbi Insider
GR11NV | 21 November 2011 19
Nonetheless, despite the recent volatility, we believe that the Dim Sum bond market
remains a viable avenue for investors looking to enhance returns. We see the recent
price correction and the emergence of „two-way‟ interest in the market as a healthy
development. In addition, varying performance across rating categories suggests that
investors will need to conduct more diligent credit analysis. This is also a positive
development. While liquidity is down considerably from its peak levels in the March-
June 2011 period, when daily turnover averaged CNH 500mn, current daily volumes
of around CNH 150-200mn are still above the low point of CNH 50mn seen at the
height of the spread widening in September 2011.
Looking at the different categories in greater detail
We have broadly divided individual issuers in the Dim Sum bond market into three
categories: (1) multinational issuers that have issued bonds in the CNH market, (2)
HG issuers rated in the single-A to BBB category (excluding the highly rated China
sovereign but including quasi-sovereign issuers), and (3) sub-investment-grade
issuers rated in the BB to single-B range. We have looked at representative names
for the purpose of this exercise; other bonds in these categories may have moved
differently. Also note that there are a number of unrated issuers, as only about 40%
of CNH bond issuance has been rated. These would fall into one of the three
categories based on their overall credit ratings or their perceived credit profile, which
would place them in either the HG or HY category.
HG multinational issuers
In the multinational space (CNH and USD paper), the specific issues we considered
were the MCD 13 in CNH and USD and the Russian financial issue VTB 13 (CNH)
and VTB 15 (USD). All of them have seen a marked tightening of USD spreads
versus the comparable CNH bond issues. The clearest example of this is MCD,
where the CNH paper currently yields 2.04%, while the USD bonds of similar maturity
yield just 0.33%. In fact, McDonald‟s is one of the few credits where the USD bonds
have almost always traded tighter than the CNH bonds on a swapped basis. While
McDonald‟s is regarded as one of the safest credits in the US, and its USD bonds
have traditionally traded tight, the differential with the CNH bonds is currently at its
widest. As recently as May 2011, the differential between the USD and CNH paper
was flat to marginally negative (i.e., the CNH bonds briefly traded inside the USD
issue; see Chart 4).
Chart 4: MCD CNH trades cheap to the USD bonds
McDonald’s CNH 13 & CNH 13 (ASW) vs. USD 13 yield (%)
Chart 5: VTB CNH and USD issues converge
VTB CNH 13 & CNH 13 (ASW) vs. USD 15 yield (%)
Sources: Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
CNH minus USD
MCD 13 (CNH)
MCD 13 (USD)
CNH asset-swapped
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Jan-11 Mar-11 May-11 Jul-11 Sep-11
CNH minus USD
VTB 13 (CNH)
VTB 15 (USD)CNH asset-
swapped
-4
-2
0
2
4
6
8
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11
Following the recent correction, the
mid-range of HG issues offers the
best value for investors, in our view
The development of a two-way bond
market in the Dim Sum bond space
is healthy and bodes well for the
future
The Renminbi Insider
GR11NV | 21 November 2011 20
In contrast, the VTB USD bonds traded 334bps wider than their CNH counterparts as
recently as early October. The differential has since collapsed to the point where the
VTB 13 Dim Sum bonds are trading flat to marginally inside the USD bonds – the first
time this has happened (see Chart 5). Nevertheless, given high volatility in VTB
paper generally, investors should wait for better entry points once volatility subsides
before buying these bonds.
Local HG issuers
In the local HG space, both the RESOUR 15 and HKCGAS 16 CNH-denominated
bonds have seen the differentials with their USD-denominated counterparts narrow to
their tightest-ever levels. Even so, USD yields are still higher in absolute terms than
yields on the CNH bonds (Charts 6 and 7). Here again, the narrowing in absolute
terms has been partly offset by the fact that the USD CNH cross-currency swap
(CCS) curve has changed shape, so that the swapped yields for CNH bonds make
them less attractive than before. More interestingly, this CNH bond weakness has
occurred as the USD HG issues have rallied in both yield and price terms (due partly
to the strengthening of USTs as risk assets globally have weakened).
Chart 6: RESOUR 15 CNH bonds have cheapened
China Resources CNH 15 & CNH 15 (ASW) vs. USD 15 yield
(%)
Chart 7: HKCGAS USD & CNH differentials narrow
HKCGAS CNH 16 & CNH 16 (ASW) vs. USD 18 yield (%)
Sources: Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
Chart 8: PWRLNG 14 CNH issue weakens
PWRLNG CNH 14 & CNH 14 (ASW) vs. USD 15 yield (%)
Chart 9: SHASHU 14 CNH issue less volatile than USD
SHASHU CNH 14 & CNH 14 (ASW) vs. USD 16 yield (%)
Sources: Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
CNH minus USD
RESOUR 15
RESOUR 15 (USD)
CNH Asset Swapped
-3
-2
-1
0
1
2
3
4
5
6
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11
CNH minus USD
HKCGAS 16 (CNH)
HKCGAS 18 (USD)
CNH asset-swapped
-4
-3
-2
-1
0
1
2
3
4
5
Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11
CNH minus USD (RHS)
PWRLNG 14 (CNH)
PWRLNG 15 (USD)CNH asset-
swapped
-4
-2
0
2
4
6
0
10
20
30
40
Mar-11 May-11 Jul-11 Sep-11 Nov-11
CNH minus USD (RHS)
SHASHU 14 (CNH)
SHASHU 16 (USD)
CNH asset-swapped
-10
-8
-6
-4
-2
0
0
4
8
12
16
20
Jul-11 Aug-11 Sep-11 Oct-11
The Renminbi Insider
GR11NV | 21 November 2011 21
Local HY issuers
Unlike in the HG space, the USD- and CNH-denominated bonds of the two HY
issuers we considered – PWRLNG (Powerlong) in the property space and SHASHU
(China Shanshui) in the industrials space – have fallen in price terms, although they
have recovered some lost ground relative to their worst levels. In the case of
Powerlong, the fall was quite sharp (Charts 8 and 9). Negative perceptions of the
Chinese HY sector have driven the overall weakness in this sector. These have been
driven by both micro issues (including accounting and transparency concerns about
Chinese corporates and property-sector weakness) and macro issues related to fears
of a sharp economic slowdown in China. Even for these HY bonds, the Dim Sum
bonds have clearly underperformed their USD counterparts. This has been
particularly pronounced in the case of PWRLNG, to the extent that the CNH bonds
now trade wider than the USD bonds (the opposite situation prevailed previously).
Under the circumstances, investors willing to take PWRLNG risk might want to
consider putting it on via CNH rather than USD, although the differences in yield are
not material. It is also worth highlighting that liquidity is considerably higher in the
USD paper, so buying the CNH bonds might be a better choice for investors with a
„buy and hold‟ objective.
The Renminbi Insider
GR11NV | 21 November 2011 22
Economics – The meaning of micro-loosening
Monetary policy was tightened in Q3, but loosened a bit in November
CNH market disruption appears to have caused reversal of FX flows
Further loosening is on the cards
As gnomic utterances about monetary policy go, „weitiao‟ („micro-adjustment‟) is up
there with the best. Premier Wen Jiabao spoke three weeks ago about how China‟s
“prudent” monetary policy would be “micro-adjusted”. Facing an insolvent Ministry of
Railways (and thousands of unpaid rail workers) and an SME funding crisis of
unclear proportions the authorities were clearly pressure to do something to loosen
monetary policy.
But so far, that something has had a limited impact on business conditions on the
ground. Lending growth has stopped decelerating, but that is about it. The People‟s
Bank of China (PBoC) continues to believe that China‟s domestic economy is doing
OK and that its policy stance is not overly tight. Despite Europe‟s existential crisis,
China‟s economic leadership team is still more or less supporting this line. In this
section, we quickly run through just how „prudent‟ monetary policy became in Q3,
how the „micro-adjustment‟ is going, and where monetary conditions are likely to go
in the run-up to Chinese New Year in January 2012.
A tough time to borrow
De facto lending rates rose almost 80bps in Q3 – the weighted average one-year
loan rate moved to 8.06% from 7.29% in Q2, as Chart 1 shows (banks can lend at
any rate above the benchmark rate, which is currently at 6.56% for one-year loans).
In other words, while the benchmark rate was hiked only once, corporate China was
hit with the equivalent of three 25bps hikes. The lending rate has not reached the
highs of H1-2008, but the premium to the benchmark rate is now 150bps, higher than
the 125bps premium recorded in the previous round of tightening in 2008. 67% of all
loans in the system were priced above PBoC benchmark rates in Q3, up from 61% in
Q2. This is a tough time to be a borrower.
Official loan growth in September was 15.9% y/y, 0.4ppt above the average from
2000-08, according to the PBoC‟s Q3 Monetary Policy Report. In other words, the
Chart 1: Rates are a lot higher in reality
1-year base and weighted average interest rate, %
Chart 2: Below-average loan growth
Loan growth, real, y/y %
Sources: CEIC, Standard Chartered Research Sources: CEIC, Standard Chartered Research
One-year weighted-average
lending rate
One-year base lending rate
5%
6%
7%
8%
9%
Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
y/y % real
Average
0%
10%
20%
30%
40%
Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Stephen Green, +852 3983 8556
Stephen.Green@sc.com
Actual lending rates rose
significantly in Q3
The Renminbi Insider
GR11NV | 21 November 2011 23
central bank suggests that monetary conditions are not really that tight. However,
inflation-adjusted loan growth is considerably slower – about 9% y/y at present – and
is running well below its historical average (see Chart 2). We also note that real loan
growth has just begun to tick up.
‘Total social financing’ has slowed too
With the development of other sources of credit, we also need to track non-loan
sources of finance. In Chart 3, we show the components of the PBoC‟s concept of
„total social financing‟ (TSF) as best we can. TSF extension has slowed markedly as a
result of changes to the regulation of products such as trust and entrustment loans.
There was a net contraction in bankers-accepted drafts (BAD) outstanding in Q3.
This presumably resulted from the PBoC‟s move to demand that reserves be paid on
the margin deposits required by the banks for issuing BADs (although there are
reports that the PBoC is going easy on the banks as far as enforcement of this rule is
concerned).
BADs can be used as payment for goods. Many firms finance their short-term trade
by discounting those BADs. Discounting rates for these bills are therefore critical, and
move independently of the PBoC‟s base rates. As Chart 7 shows, draft discounting
rates have fallen from their painful peak of 15% in late September, but were holding
at around 9% as of mid-October, which is still pretty expensive. We note that many
SMEs get their financing via this route – so for them, monetary conditions have
hardly eased. Further declines in the discount rate depend very much on the banks‟
ability to expand their total lending.
We also note the small reduction in trust loans in Q3, the result of a crackdown on
bank-trust products by the China Banking Regulatory Commission (CBRC). One of
the first public statements by new CBRC Chairman Shang Fulin was to remind banks
to move bank-trust loan products onto their balance sheets. This will not affect the
amount banks can lend, since such transfers do not count towards the loan quota,
but they do require provisions and capital to be held against the loans. A recent
article in the 21st Business Herald estimated that some CNY 1trn (USD 160bn) worth
of such loans are still held off-balance-sheet. Trusts have to raise capital against their
managed assets, and some types of products (e.g., real estate loans) are being
controlled.
(An aside: The TSF numbers released in the PBoC‟s reports this year do not appear to
add up. We spot an unexplained disparity of some CNY 400bn between the total
announced for the first three quarters of 2011 (CNY 9.8trn) and the sum of the
component parts announced each quarter during the period (CNY 9.486trn). A
consolidated table with the quarterly TSF numbers would be a welcome addition to the
Q4 report.)
Money multiplier is falling
China‟s fundamental monetary problem – fast exogenous money supply growth – is
still a clear and present danger. As Chart 6 shows, as a result of FX inflows, official
reserve money is still growing at 32% y/y. The PBoC managed to push down the
multiplier (the link between M2 and reserve money growth) to 3.71 in September,
near its 10-year low. However, the PBoC‟s definition of reserve money is
unconventional; we note that the pace of growth in the central bank‟s total liabilities is
considerably lower than reserve money growth, at only 15% y/y, which is better news.
Despite the rapid reserve money
build, the loan quota restrictions
have suppressed the money
multiplier, to near its 2008 low.
Many firms rely upon trade finance,
and rates – though down from the
peak – are still high
The Renminbi Insider
GR11NV | 21 November 2011 24
Current and capital accounts remain in surplus, but onshore CNY
selling
Exogenous money supply comes from China‟s twin external imbalances. The current
account was still in significant surplus in Q3, at USD 58bn (USD 146bn for the first
three quarters of 2011), moderately down from last year‟s level (see Chart 4).
In the capital account, net direct investment flows were USD 36bn in Q3 (USD 128bn
for Q1-Q3). The FX reserves build-up in Q3 was USD a still-substantial USD 92bn
(USD 373bn for Q1-Q3). Despite the weirdness of September, when the onshore CNY
traded above the ever-lower CNY daily fixings (more on this below), we believe the twin
surpluses suggest that the case for CNY undervaluation is still in place. 2012 is likely to
see continuing surpluses, albeit smaller. We therefore look for moderate CNY
appreciation in 2012, as laid out elsewhere in this publication.
In terms of the flow of funds, FX inflows were concentrated in July and August. These
inflows appear to have partly reversed in September and October; we believe this
was driven by the offshore CNH market. When USD-CNH is trading at a discount to
onshore USD-CNY (as in September-October), this encourages importers to buy
their dollars onshore, while exporters have a bigger incentive to sell their dollars
offshore. This is the opposite of the incentives that dominated up to September,
when USD-CNH traded at a premium to onshore USD-CNY. Thus, from Q1 to Q3,
net dollar selling onshore meant the PBoC had more dollars to buy, while in
September and October the PBoC had to supply more dollars. Because corporates
are involved in hedging forward their future exposures on and offshore, the FX flows
involved can be larger than the underlying goods trade in those months.
Chart 5 we show the apparent FX outflow that resulted from these dynamics –
September is reminiscent of late 2008, when CNY sentiment soured and hedging
driven by appreciation expectations reversed. The chart, derived from the FX reserve
numbers (adjusted for valuation effects) and the available monthly trade and direct
investment data, comes with a warning: the data is partial, and we do not know for
sure how the State Administration of Foreign Exchange (SAFE) now calculates the
FX reserves. It is possible that it marks its book to market at the end of each quarter.
The chart does show lots of unexplained FX inflows in Q1-Q3, followed by an
apparent reversal in September.
Chart 3: Total social financing is declining
CNY bn
Sources: CEIC, Standard Chartered Research
-500
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Q1 2010 Q2 2010 Q3 2010 Q1 2011 Q2 2011 Q3 2011
CNY loans FX loans Entrustment loansTrust loans Bankers accepted drafts Corporate bondsNon-financial shares
Trade and investment accounts still
have big surpluses, but outward
remittances appear to have picked
up
Apparent FX outflows explained, we
think, by shifting gap between CNH
and CNY FX rates.
The Renminbi Insider
GR11NV | 21 November 2011 25
Another indicator of net CNY selling is if the „Net purchases of FX‟ (外汇占款) number
turns negative, which it did to the tune of CNY 25bn (USD 4bn) in October. The last
time it did so was in January-February 2009. This number is usually positive,
reflecting net buying of dollars by commercial banks and the PBoC. The negative
number in October indicates that the corporate sector turned into a net seller of
CNY/net buyer of dollars, driven by the dynamics explained above, we believe. One
or two months of small FX „outflows‟ do not a China crisis make, so we advise some
caution before calling this another signal of China‟s imminent collapse. But the
numbers clearly bear watching.
So what now?
So far, Ministry of Railways (MoR) has benefitted the most from „micro-adjustment‟.
Banks were reportedly instructed to extend CNY 200-250bn in new loans to the MoR,
which already has CNY 2trn of outstanding debt and whose operations have negative
cash flow (see On the Ground, 26 July 26 2011, ‘China – The Ministry of
Railways’ many debts’). There are reports from Zhejiang that banks have extended
extra funds to SMEs, and that this liquidity is outside of the loan quota. Otherwise,
though, money remains pretty tight, especially for SMEs: the discounting rate
remains elevated (Chart 7).
We expect loan CNY growth of around CNY 8.5trn in 2012 (up 15% y/y), and expect
monthly lending to exceed CNY 600-650bn in November and December 2011. The
official loan quota for 2012 will probably come in below this number, at around CNY
7.5-8.0trn, on the basis that with a GDP growth target of 8% and CPI inflation target
of 4%, lending growth should be targeted at 12-14%.
However, our inflation outlook for 2012 is benign, the informal financial sector is
already deleveraging (recall the decline in trust lending), and policy makers will
increasingly want to boost growth from Q2-2012 onwards (see On the Ground, 25
October 2011, ‘China – Forecast revisions, 2012-13’). Local government
investment vehicles will need financing, and the banks are still the main source (as
Chart 3 shows, bond issuance is still small, but it could be boosted). The PBoC‟s
ability to control banks through the quota will be limited.
Chart 4: Current account is smaller, but still big
USD bn
Chart 5: Apparent FX outflows in September
USD bn
Sources: CEIC, Standard Chartered Research Sources: CEIC, Standard Chartered Research
-20
0
20
40
60
80
100
120
Q1 2010 Q3 2010 Q1 2011 Q3 2011
Transfers Income Trade
-80
-60
-40
-20
0
20
40
60
80
100
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Trade (BoP) Net FDI (BoP)
Returns on investment Everything else
Micro-loosening has benefitted the
Ministry of Railways and some
Zhejiang SMEs. But trade financing
is still expensive.
The Renminbi Insider
GR11NV | 21 November 2011 26
As far as interbank rates go, there are volatile times ahead in the run up to Chinese
New Year (Jan 23). Fiscal funds will be injected into the system (On the Ground,
November 10, 2011, ‘China – Fantastical fiscal fireworks’). But at the same time,
there is little PBoC bill redemption and with Chinese New Year so soon in January,
corporates may be hoarding cash early. We believe a cut in the reserve requirement
ratio (RRR) is likely before Chinese New Year – but in the run-up to that interbank
interest rates are likely to be volatile and lack a clear direction. After the CNY holiday,
we see inter-bank rates lower.
Chart 6: Strong reserve growth, a suppressed multiplier
Money multiplier (x) and reserve money growth (%)
Chart 7: Off the highs, but not low
Weighted average bill discount rate, %
Sources: CEIC, Standard Chartered Research Sources: CEIC, Standard Chartered Research
Money multiplier
Reserve money, y/y %
(RHS)
0%
10%
20%
30%
40%
50%
60%
3.0
3.5
4.0
4.5
5.0
5.5
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
0
2
4
6
8
10
12
14
16
18
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Interbank rates will be volatile in the
run up to Chinese New Year (Jan
23), but after that should be lower.
The Renminbi Insider
GR11NV | 21 November 2011 27
Appendix
The CNH timeline
2003-2007
December 2003: The HKMA announced the beginning of CNY business on a trial basis in Hong Kong.
Initial development of the offshore market was extremely limited, basically confined to the build-up of CNY
in low-yielding retail bank deposits and the provision of restricted personal CNY services.
June 2007: The PBoC and National Development and Reform Commission (NDRC) announced that
financial entities incorporated in China were allowed to issue CNY bonds in Hong Kong, subject to
approval. This was the first step towards creating more uses for CNY funds in Hong Kong.
December 2008: China signed its first bilateral currency swap arrangement with South Korea. Shortly
after, the PBoC and the HKMA signed a currency swap agreement to provide CNY liquidity of up to CNY
200bn for a renewable three-year term. The number of swap participants has since increased to eight
counterparties.
June 2009: The PBoC launched the pilot scheme for CNY settlement of cross-border trade between
Shanghai and four cities in Guangdong province on the one hand, and Hong Kong and Macau on the
other. This scheme allowed CNY conversion within selected cities between the onshore and offshore
markets for trade-related transactions.
September 2009: China‟s Ministry of Finance launched two tranches of CNY bonds (CNY 6bn in total) to
retail and institutional investors in Hong Kong. This was the first CNY-denominated sovereign offering
outside of the mainland.
2008-2009
2010
February 2010: The HKMA issued a clarification that participating banks could develop CNY business
based on regulatory requirements and market conditions in Hong Kong, as long as these businesses do
not entail the flow of CNY funds back to the mainland.
June 2010: Six regulatory bodies in China released a joint circular, expanding the scope of the CNY
trade settlement pilot scheme to 20 mainland provinces on the one hand, and all overseas countries and
regions on the other.
July 2010: The PBoC and the HKMA signed a Supplementary Memorandum of Co-operation, which
broadened the scope of CNY holders to all corporates and differentiated between treatment of their trade-
and non-trade-related CNY conversions. Subsequently, the development of CNY financial products also
picked up.
August 2010: The PBoC announced that foreign central banks, CNY clearing banks, and cross-border
CNY trade-settlement-participating banks could take part in the interbank bond market in mainland China.
This is subject to a quota system, with specific limits to be approved by the PBoC.
August 2010: Standard Chartered Bank managed a CNY 200mn bond issuance for McDonald‟s
Corporation. This was the first issuance of a CNY-denominated bond by an overseas non-financial
corporation outside the mainland. This signified the emergence of a new funding channel for international
companies to raise working capital for their China operations.
October and December 2010: The depletion in late October of the trade-related conversion quota
granted to the clearing bank led to a revamp of the arrangement in December. Refinements included an
expanded quota and measures to discourage offshore CNY hoarding and speculation. Separately, the
PBoC expanded the list of Mainland Designated Enterprises in December.
The Renminbi Insider
GR11NV | 21 November 2011 28
January 2011: The PBoC launched a pilot scheme for the settlement of overseas direct investments in
CNY (CNH ODI). Under the scheme, Hong Kong branches and correspondent banks of mainland banks
can obtain CNY funds from the mainland and finance these investments.
January 2011: The first CNY synthetic (straight) bond was issued in Hong Kong.
March 2011: The HKEx announced plans for the H2-2011 roll-out of the „RMB Equity Trading Support
Facility‟ (TSF) – back-up liquidity to facilitate the trading of CNH equities in the secondary market.
March 2011: The launch of the Fiduciary Account arrangement was announced (effective in April) to help
banks better manage their credit exposure to the clearing bank when using their CNY funds. The interest
rate paid by the PBoC to the clearing bank was cut to 0.72% from 0.99%. The clearing bank and most
banks in Hong Kong subsequently lowered their CNY deposit rates accordingly.
April 2011: The first CNH IPO was launched in Hong Kong.
June 2011: The PBoC announced a number of policy fine-tuning steps on 8 June, including the
alignment of treatment of trade-related FX conversion by participating banks with onshore agent banks
and with the clearing bank. For services trade settlement, FX conversion offshore can only enjoy the
offshore CNY (CNH) rate. Separately, the spot USD-CNH fixing was officially launched on 27 June.
July 2011: PBoC announced that it would stop handling new applications from onshore corporates for
cross-border CNY loans by offshore banks (shareholder loans and trade financing were not affected).
Separately, the HKMA relaxed treatment of CNH FX swaps under the 10% NOP rule.
August 2011: China Vice Premier Li Keqiang visited Hong Kong and announced more than 30
concessions, including CNH FDI, R-QFII, and an explicit commitment to broadening and deepening
existing CNH markets. MOFCOM announced a consultation on new CNH FDI rules. The CNY trade
settlement scheme was officially expanded to the whole of China. The Ministry of Finance issued CNY
20bn worth of CNH bonds. The HKMA required banks to include lending in all currencies via CNY L/C
discounting in their NOP calculations.
September 2011: Global risk aversion caused CNH to weaken, leading to the exhaustion of the CNH
trade settlement conversion quota for Q3-2011. With the quota exhausted, CNH weakened further.
October 2011: The trade conversion quota was renewed and expanded for Q4. New CNH foreign direct
investment rules were formalised by MOFCOM and the PBoC.
November 2011: The HKMA issued a circular that clarified the eligibility criteria for firms tapping the trade
conversion quota and increased documentation requirements.
2011
The Renminbi Insider
GR11NV | 21 November 2011 29
Dim Sum bond run
CNH government bonds
Issuer Sector Issue date Size
(CNY mn) Coupon Maturity Tenor
Indicative bid yield (%)
MoF CGB Sovereign 27-Oct-2009 2,500 2.70 27-Oct-2012 1 1.20
MoF CGB Sovereign 20-Dec-2010 3,000 1.60 20-Dec-2012 1 1.20
MoF CGB Sovereign 06-Sep-2011 5,000 1.60 06-Sep-2013 2 1.25
MoF CGB Sovereign 01-Dec-2010 2,000 1.00 01-Dec-2013 2 1.25
MoF CGB Sovereign 18-Aug-2011 6,000 0.60 18-Aug-2014 3 1.60
MoF CGB Sovereign 27-Oct-2009 500 3.30 27-Oct-2014 3 1.70
MoF CGB Sovereign 01-Dec-2010 2,000 1.80 01-Dec-2015 4 1.95
MoF CGB Sovereign 18-Aug-2011 5,000 1.40 18-Aug-2016 5 2.10
MoF CGB Sovereign 18-Aug-2011 3,000 1.94 18-Aug-2018 7 2.30
MoF CGB Sovereign 01-Dec-2010 1,000 2.48 01-Dec-2020 9 2.70
MoF CGB Sovereign 18-Aug-2011 1,000 2.36 18-Aug-2021 10 2.70
Policy bank bonds
Issuer Sector Issue date Size
(CNY mn) Coupon Maturity Tenor
Indicative bid yield (%)
China Development Bank Policy bank 11-Nov-2010 3,000 2.70 11-Nov-2013 2 2.40
CNH FI bank bonds
Issuer Sector Issue date Size
(CNY mn) Coupon Maturity Tenor
Indicative bid yield (%)
Bank of Communications FI bank 04-Mar-2011 1,000 1.00 04-Mar-2013 2 2.70
Far East Horizon Ltd. FI bank 03-Jun-2011 1,250 3.90 03-Jun-2014 3 7.18
ICBC (Asia) FI bank 24-Sep-2010 1,000 2.25 24-Sep-2012 1 1.90
UA Finance BVI Ltd. FI bank 28-Apr-2011 500 4.00 11-Nov-2013 2 13.97
VTB Capital SA FI bank 23-Dec-2010 1,000 2.95 28-Apr-2014 3 4.70
CNH multinational bonds
Issuer Sector Issue date Size
(CNY mn) Coupon Maturity Tenor
Indicative bid yield (%)
Air Liquide Finance Multinational 19-Sep-2011 1,750 3.00 19-Sep-2016 5 3.17
BP Capital Markets Plc Multinational 14-Sep-2011 700 1.70 15-Sep-2014 3 2.35
Caterpillar Financial Services Multinational 01-Dec-2010 1,000 2.00 01-Dec-2012 1 2.00
Caterpillar Financial Services Multinational 12-Jul-2011 2,300 1.35 12-Jul-2013 2 2.29
McDonald's Corporation Multinational 16-Sep-2010 200 3.00 16-Sep-2013 2 1.95
Tesco PLC Multinational 01-Sep-2011 725 1.75 01-Sep-2014 3 2.12
Volkswagen AG Multinational 23-May-2011 1,500 2.15 23-May-2016 5 2.99
The Renminbi Insider
GR11NV | 21 November 2011 30
Sources: Bloomberg, Standard Chartered Research
CNH corporate bonds
Issuer Sector Issue date Size
(CNY mn) Coupon Maturity Tenor
Indicative bid yield (%)
Beijing Enterprise Water Corporate 30-Jun-11 1,000 3.75 30-Jun-14 3 3.75
Beijing Enterprise Water Corporate 30-Jun-11 450 5 30-Jun-16 5 4.94
Big Will Investments (Guangzhou R&F Properties)
Corporate 29-Apr-11 2,612 7 29-Apr-14 3 21.19
BYD HK Co. Ltd. Corporate 28-Apr-11 1,000 4.5 28-Apr-14 3 16.93
China Merchants Holdings (Hong Kong) Corporate 19-Nov-10 700 2.9 19-Nov-13 2 2.71
China Power International Corporate 23-Dec-10 800 3.2 23-Dec-15 4 4.83
China Power New Energy Corporate 29-Apr-11 500 3.75 29-Apr-14 3 6.45
China Resources Power Corporate 12-Nov-10 1,000 2.9 12-Nov-13 2 2.9
China Shanshui Cement Group Ltd. Corporate 22-Jul-11 1,500 6.5 22-Jul-14 3 9.53
CNPC Golden Autumn Limited Corporate 19-Oct-11 2,500 2.55 26-Oct-13 2 2.68
CNPC Golden Autumn Limited Corporate 19-Oct-11 500 2.95 26-Oct-14 3 2.28
Eastern Air Overseas HK Corporate 8-Aug-11 2,500 4 8-Aug-14 3 4
Global Logistics Properties Corporate 11-May-11 2,650 3.38 11-May-16 5 3.87
Hai Chao Trading Co. Ltd. Corporate 4-Aug-11 900 2 4-Aug-14 3 3.17
Hainan Airline HK Corporate 16-Sep-11 1,000 6 16-Sep-14 3 8.12
HKCG Finance Ltd./Towngas Corporate 11-Apr-11 1,000 1.4 11-Apr-16 5 2.99
Intime Department Store Corporate 19-Jul-11 1,000 4.65 21-Jul-14 3 7.59
Lafarge Shui On Cement Corporate 9-Nov-11 1,500 9 14-Nov-14 3 8.52
Pacific Andres Res Dev Corporate 2-Jun-11 600 6.5 2-Jun-14 3 15.91
Right Century Corporate 3-Jun-11 3,000 1.85 3-Jun-14 3 3.41
Road King Infrastructure Ltd. Corporate 25-Feb-11 1,300 6 25-Feb-14 3 16.38
Sinochem Hong Kong Group Ltd. Corporate 18-Jan-11 3,500 1.8 18-Jan-14 3 3.62
Zhongsheng Group Corporate 21-Apr-11 1,250 4.75 21-Apr-14 3 11.02
CNH synthetic bonds
Issuer Sector Issue date Size
(CNY mn) Coupon Maturity Tenor
Indicative bid yield (%)
Evergrande Real Estate Group Corporate 19-Jan-2011 3,700 7.50 19-Jan-2014 3 19.90
Evergrande Real Estate Group Corporate 19-Jan-2011 5,550 9.25 19-Jan-2016 5 21.06
Powerlong Real Estate HL Corporate 17-Mar-2011 750 11.50 17-Mar-2014 3 30.37
Shui On Land Corporate 23-Dec-2010 3,000 6.88 23-Dec-2013 2 8.47
Shui On Land Corporate 26-Jan-2011 3,500 7.63 26-Jan-2015 4 9.28
The Renminbi Insider
GR11NV | 21 November 2011 31
Product update – Latest CNH products available in Hong Kong
CNH product Availability Remarks
Spot Yes Daily CNH interbank liquidity of USD 1.5bn, compared to USD 10-15bn onshore.
Forward Yes There are now CNY DF (onshore), CNY NDF (offshore) and CNH DF curves (offshore).
FRA/CCS Yes for CCS There is no FRA CNH. Daily CCS turnover has increased sharply recently to USD 150-200mn in the 1-3Y; longer tenors are less liquid.
Money market Yes Interbank trading is relatively thin amid CNH „pooling‟ at a small number of institutions. Daily interbank CNH lending around CNH 1bn in recent weeks.
CDs/structured notes Yes for CDs CDs launched; structured notes may be seen soon.
IRS Yes The CNH 3M SHIBOR IRS is still pretty illiquid, with daily turnover of CNH 0-100mn. The CNY NDIRS (USD) has daily liquidity of around CNY 1bn.
Structured products Not all Fully funded structures so far.
Bonds Yes Growing number of both regular and synthetic issues; daily turnover is steady at CNH 200mn.
Source: Standard Chartered Research
The Renminbi Insider
GR11NV | 21 November 2011 32
Key China views and projections
Central bank outlook
Current To end-2011 Next Forecast next change Last change
Benchmark rate (%) (bps) meeting Date Action Date Action
China 1Y lending rate 6.56 0 NA Q1-2013 +25bps 06-Jul-11 +25bps
FICC-on-the-run
Spot 3M 3-12M Fundamentals Current trades
CNY 6.36 ↑ ↑ CNY gains to curb inflation as risk appetite and fundamentals stabilise -
10Y bond 3-6M 6M+ Fundamentals Current trades
China 3.93 ↓ ↑ Growth and inflation to slow down before rebounding in H2-2012 -
Forecasts – Economic
Real GDP growth (%) Inflation (yearly average %) Current account (% of GDP)
2010 2011 2012 2013 2010 2011 2012 2013 2010 2011 2012 2013
China 10.3 9.2 8.5 8.5 3.3 5.1 3.2 5.4 5.5 3.6 2.3 2.1
Forecasts – FX
End-period Period average
2011 2012 2013 2012 2013 2014 2015 2016
Q4 Q1 Q2 Q3 Q4 Q1
USD-CNY 6.32 6.28 6.24 6.18 6.12 6.07 6.23 6.00 5.85 5.65 5.45
forward 6.36 6.35 6.34 6.34 6.34 6.33
USD-CNH 6.33 6.265 6.225 6.165 6.105 6.055
Forecasts – China rates
End-period Period average
2011 2012 2012 2013 2014 2015 2016
Q4 Q1 Q2 Q3 Q4
Policy rate
1Y lending rate 6.56 6.56 6.56 6.56 6.56 6.56 7.31 (YE)
Bonds
2Y 3.50 3.40 3.60 3.80 4.00 3.70 3.80 3.60 3.30 3.30
10Y 3.60 3.80 4.00 4.20 4.30 4.00 4.50 4.40 4.30 4.30
Swaps
7-day repo 2.50 2.50 2.50 3.00 3.50 3.90 4.00 4.00 4.00 4.00
2Y 3.50 3.70 3.90 4.10 4.15 4.00 4.20 4.20 4.20 4.20
10Y 3.40 3.80 4.10 4.30 4.40 4.20 4.50 4.50 4.40 4.40
CNH market
2011
Jan Feb Mar Apr May Jun Jul Aug Sep
Remittances for RMB cross-border trade settlement (CNY bn)
Hong Kong 108 87.4 115.4 134.2 153.4 205.1 149 185.8 190.6
Jan - Mar 2011 Apr - Jun 2011 Jul - Sep 2011
China 360.3 597.3 583.4
Sources: HKMA, PBoC, Standard Chartered Research
The Renminbi Insider
GR11NV | 21 November 2011 33
Key China views and projections (continued)
Chart 1: CNH deposit growth (CNY bn)
End-September CNH deposits: CNY 622.2bn
Chart 2: Our estimates of daily market turnover (USD mn)
End-October daily turnover in CNH spot: USD 1.5bn
Sources: HKMA, Standard Chartered Research Sources: Standard Chartered Research
Chart 3: China’s projected annual total CNY trade
settlement volume (USD bn)
Chart 4: China’s projected annual import value of goods
by settlement currency (USD bn)
Sources: PBoC, Standard Chartered Research Sources: PBoC, Standard Chartered Research
Time deposits
End 2011 Forecast
End 2012 Forecast
0
200
400
600
800
1,000
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Dec-11
Demand and savings deposits
0
500
1,000
1,500
2,000
2,500
3,000
Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11
CNH swap
CNH spot
77
310
475
690
920
1,220
0
400
800
1,200
1,600
2009 - 2010 2011 2012 2013 2014 2015
188 270 371 472 593
1,5281,668
1,8192,003
2,204
0
1,000
2,000
3,000
2011 2012 2013 2014 2015
Imports settled in other currencies
Imports settled in CNY
Chart 5: Issuance of Dim Sum bonds since 2007 (CNY bn) Chart 6: Trade-weighted value of the CNY (CNY NEER) is
now above its June 2010 post-de-peg level
Sources: Bloomberg, Standard Chartered Research Sources: BIS, Standard Chartered Research
0
20
40
60
80
100
120
140
160
180
2007 2008 2009 2010 2011 YTD
BIS CNY NEER -Monthly
CNY NEER -Our Daily Estimate
105
110
115
120
Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
The Renminbi Insider
GR11NV | 21 November 2011 34
Disclosures Appendix
Recommendations structure
Standard Chartered terminology Impact Definition
Issuer – Credit outlook
Positive Improve We expect the fundamental credit profile of the
issuer to <Impact> over the next 12 months Stable Remain stable
Negative Deteriorate
Apart from trade ideas described below, Standard Chartered Research no longer offers specific bond and CDS recommendations.
Any previously-offered recommendations on instruments are withdrawn forthwith and should not be relied upon.
Standard Chartered Research offers trade ideas with outright Buy or Sell recommendations on bonds as well as pair trade recommendations
among bonds and/or CDS. In Trading Recommendations/Ideas/Notes, the time horizon is dependent on prevailing market conditions and may
or may not include price targets.
Credit trend distribution (as at 16 November 2011)
Coverage total (IB%)
Positive 15 (6.7%)
Stable 180 (17.2%)
Negative 28 (17.9%)
Total (IB%) 223 (16.6%)
Credit trend history (past 12 months)
Company Date Credit outlook
Please see the individual company reports for other credit trend history
Regulatory Disclosure: Subject companies: Air Liquide, Air Liquide Finance, Bank of Communications, Beijing Enterprise Water, Big Will Investments (Guangzhou R&F Properties), BP Capital Markets
PLC, BYD HK Co. Ltd., Caterpillar Financial Services, China Development Bank, China Merchants Holdings (HK), China Power International, China Power New Energy, China
Resources, China Resources Power, China Sanshui Cement, China Shanshui Cement Group Ltd., CNPC Golden Autumn Limited, Eastern Air Overseas HK, Evergrande Real
Estate Group, Far East Horizon Ltd., Global Logistics Properties, Hai Chao Trading Co. Ltd., Hainan Airline HK, HK & China Gas, HKCG Finance Ltd./Towngas, ICBC (Asia), Intime
Department Store, Lafarge Shui On Cement, McDonalds, McDonalds Corporation, Pacific Andes Resources Development, Powerlong Real Estate HL, Right Century, Road King
Infrastructure Ltd., Shui On Land, Sinochem Hong Kong Group Ltd., Tesco PLC, The Ministry of Finance (China Government/sovereign), UA Finance BVI Ltd., Volkswagen,
Volkswagen AG, VTB Capital SA, VTB Capital SA, Zhongsheng Group
Standard Chartered Bank and/or its affiliates have received compensation for the provision of investment banking or financial advisory services within the past one
year: -
The Renminbi Insider
GR11NV | 21 November 2011 35
Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and
attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
Global Disclaimer: Standard Chartered Bank and or its affiliates ("SCB”) makes no representation or warranty of any kind, express, implied or statutory
regarding this document or any information contained or referred to on the document. The information in this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices, or represent that any such future movements will not exceed those shown in any illustration. The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price. While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. The contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to on this document and should understand that statements regarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections and price target(s), if any, contained in this document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested. Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject to fluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Past performance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavour to update on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so. Accordingly, information may be available to us which is not reflected in this material, and we may have acted upon or used the information prior to or immediately following its publication. SCB is not a legal or tax adviser, and is not purporting to provide legal or tax advice. Independent legal and/or tax advice should be sought for any queries relating to the legal or tax implications of any investment. SCB, and/or a connected company, may have a position in any of the securities, instruments or currencies mentioned in this document. SCB and/or any member of the SCB group of companies or its respective officers, directors, employee benefit programmes or employees, including persons involved in the preparation or issuance of this document may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities or financial instruments referred to in this document and on the website or have a material interest in any such securities or related investment, or may be the only market maker in relation to such investments, or provide, or have provided advice, investment banking or other services, to issuers of such investments. SCB has in place policies and procedures and physical information walls between its Research Department and differing public and private business functions to help ensure confidential information, including „inside‟ information is not disclosed unless in line with its policies and procedures and the rules of its regulators. Data, opinions and other information appearing herein may have been obtained from public sources. SCB makes no representation or warranty as to the accuracy or completeness of such information obtained from public sources. You are advised to make your own independent judgment (with the advice of your professional advisers as necessary) with respect to any matter contained herein and not rely on this document as the basis for making any trading, hedging or investment decision. SCB accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental, consequential, punitive or exemplary damages) from use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services. This material is for the use of intended recipients only and, in any jurisdiction in which distribution to private/retail customers would require registration or licensing of the distributor which the distributor does not currently have, this document is intended solely for distribution to professional and institutional investors. Country-Specific Disclosures - If you are receiving this document in any of the countries listed below, please note the following: United Kingdom and European Economic Area: SCB is authorised and regulated in the United Kingdom by the Financial Services Authority (FSA). This communication is not directed at Retail Clients in the European Economic Area as defined by Directive 2004/39/EC. Nothing in this document constitutes a personal recommendation or investment advice as defined by Directive 2004/39/EC. Australia: The Australian Financial Services License for SCB is License No: 246833 with the following Australian Registered Business Number (ARBN: 097571778). Australian investors should note that this document was prepared for wholesale investors only within the meaning of section 761G of the Australian Corporations Act 2011 and the Corporations Regulations. This document is not directed at persons who are “retail clients” as defined in the Australian Corporations Act 2011. Brazil: SCB disclosures pursuant to the Securities Exchange Commission of Brazil (“CVM”) Instruction 483/10: This research has not been produced in Brazil. The report has been prepared by the research analyst(s) in an autonomous and independent way, including in relation to SCB. THE SECURITIES MENTIONED IN THIS REPORT HAVE NOT BEEN AND WILL NOT BE REGISTERED PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL AND MAY NOT BE OFFERED OR SOLD IN BRAZIL EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS AND IN COMPLIANCE WITH THE SECURITIES LAWS OF BRAZIL. China: This document is being distributed in China by, and is attributable to, Standard Chartered Bank (China) Limited which is mainly regulated by China Banking Regulatory Commission (CBRC), State Administration of Foreign Exchange (SAFE), and People‟s Bank of China (PBoC). Hong Kong: This document is being distributed in Hong Kong by, and is attributable to, Standard Chartered Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority. Japan: This document is being distributed to Specified Investors, as defined by the Financial Instruments and Exchange Law of Japan (FIEL), for information only and not for the purpose of soliciting any Financial Instruments Transactions as defined by the FIEL or any Specified Deposits, etc. as defined by the Banking Law of Japan. Singapore: This document is being distributed in Singapore by SCB Singapore branch, only to accredited investors, expert investors or institutional investors, as defined in the Securities and Futures Act, Chapter 289 of Singapore. Recipients in Singapore should contact SCB Singapore branch in relation to any matters arising from, or in connection with, this document. South Africa: SCB is licensed as a Financial Services Provider in terms of Section 8 of the Financial Advisory and Intermediary Services Act 37 of 2002. SCB is a Registered Credit Provider in terms of the National Credit Act 34 of 2005 under registration number NCRCP4. UAE (DIFC): SCB is regulated in the Dubai International Financial Centre by the Dubai Financial Services Authority. This document is intended for use only by Professional Clients and should not be relied upon by or be distributed to Retail Clients. United States: Except for any documents relating to foreign exchange, FX or global FX, Rates or Commodities, distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of Standard Chartered Securities (North America) Inc., 1095 Avenue of the Americas, New York, N.Y. 10036, US, tel + 1 212 667 0700. WE DO NOT OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS. © Copyright 2011 Standard Chartered Bank and its affiliates. All rights reserved. All copyrights subsisting and arising out of all materials, text, articles and information contained herein is the property of Standard Chartered Bank and/or its affiliates, and may not be reproduced, redistributed, amended, modified, adapted, transmitted in any way without the prior written permission of Standard Chartered Bank.
Document approved by
Stephen Green
Regional Head of Research, Greater China
Data available as of
09:00 GMT 21 November 2011
Document is released at
09:00 GMT 21 November 2011
Our Team Chief Economist and Group Head of Global Research Gerard Lyons, +44 20 7885 6988, Gerard.Lyons@sc.com
Global
Will Oswald Head of FICC Research Singapore +65 6596 8258
Will.Oswald@sc.com
Callum Henderson Head of FX Research Singapore +65 6596 8246
Callum.Henderson@sc.com
Christine Shields Head of Country Risk Research London +44 20 7885 7068
Christine.Shields@sc.com
HanPin Hsi Head of Commodities Research Singapore +65 6596 8255
HanPin.Hsi@sc.com
Kaushik Rudra Head of Credit Research Singapore +65 6596 8260
Kaushik.Rudra@sc.com
John Calverley Head of Macroeconomic Research Toronto +1 905 534 0763
John.Calverley@sc.com
East Nicholas Kwan Head of Research, East
Hong Kong +852 2821 1013
Nicholas.Kwan@sc.com
Greater China
Stephen Green Regional Head of Research,
Greater China
Hong Kong +852 3983 8556
Stephen.Green@sc.com
Korea
SukTae Oh Regional Head of Research, Korea Korea +822 3702 5011
SukTae.Oh@sc.com
South East Asia
Tai Hui Regional Head of Research,
South East Asia
Singapore +65 6596 8244
Tai.Hui@sc.com
West Marios Maratheftis Head of Research, West Dubai +9714 508 3311
Marios.Maratheftis@sc.com
Africa
Razia Khan Regional Head of Research, Africa London +44 20 7885 6914
Razia.Khan@sc.com
Americas
David Mann Regional Head of Research,
the Americas
New York +1 646 845 1279
David.Mann@sc.com
Europe
Sarah Hewin Regional Head of Research,
United Kingdom and Europe
London +44 20 7885 6251
Sarah.Hewin@sc.com
India
Samiran Chakraborty Regional Head of Research, India Mumbai + 91 22 6735 0049
Samiran.Chakraborty@sc.com
top related