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TRANSCRIPT
Offshore RMB
Express Issue 44‧
October 2017
Contents
Part 3
Part 4
Part 1
Special Topics
Chart Book
Market Review
Part 2 Policy and Peers Updates 3
5
1
Editors:
Annie Cheung
Tel :+852 2826 6192
Email : [email protected]
Kera Kong
Tel:+852 2826 6205
Email: [email protected]
Sharon Tsang
Tel :+852 2826 6763
Email: [email protected]
15
Market Review
Offshore RMB Express 1
1. The flexibility of offshore RMB
exchange rate improved
A year after the RMB was included in
the SDR currency basket, the flexibility of the
RMB’s exchange rate has greatly improved,
and the exchange rate’s two-way fluctuation
has become more prominent. Since the
beginning of this year, the onshore RMB
exchange rate against the US dollar has
appreciated 4.33%, while it was relatively
stable against a basket of currencies. Since
September, the RMB’s exchange rate
against the US dollar has undergone a V-
shape trajectory, appreciating in early
September and retreating since mid-
September. On September 29, CNH
depreciated against USD by 1.02% MoM and
closed at 6.6634. Meanwhile, CNY
depreciated against USD by 0.57% MoM and
closed at 6.6339. The average spread of the
month between CNH and CNY almost
disappeared. As for HIBOR fixing, CNH
HIBOR fixing rates were relatively stable in
September. On September 29, the O/N, 1-
week and 3-month CNH HIBOR rates were
3.73%, 4.27% and 4.69%, respectively, up
from the previous month but remaining
largely stable.
2. Major RMB business indicators
improved
RMB deposits in Hong Kong decreased
by 0.37% MoM to RMB 532.8 billion in
August 2017. The total remittance of RMB for
cross-border trade settlement amounted to
RMB 336.0 billion in August, up by RMB 6.4
billion compared with RMB 329.6 billion in
July. In Taiwan’s offshore market, as of the
end of August 2017, total RMB deposits
rebounded for 4 consecutive months, up by
0.22% or RMB 0.7 billion from the previous
month to RMB 310 billion.
.
Offshore RMB businesses stabilized in September. The flexibility of the exchange rates of
onshore and offshore RMB against US dollar (CNY and CNH) both improved. Major RMB
business indicators remain stable, and the international reserve currency function of the RMB
has gradually strengthened. The RMB has officially become an international currency.
.
Offshore RMB Market Continues
to Improve
Market Review
Offshore RMB Express 2
3. International use of RMB increased
SWIFT data show that in August 2017,
the RMB maintained its position as the fifth
most active currency for global payments
with a share of 1.94%, a decrease of 0.06
percentage points from the previous month.
Hong Kong is still the largest offshore RMB
center, with RMB trading volume accounting
for 76.23% of the total offshore RMB
turnover, followed by the UK and Singapore,
accounting for 5.19% and 4.41% respectively.
RMB RTGS turnover was RMB 18.74 trillion
in September 2017 with a MoM decrease of
7.2%. In the first nine months of this year,
RTGS turnover increased by 5.0% YoY to
RMB 161.08 trillion.
4. The international reserve currency
function of RMB has gradually
strengthened
According to the COFER report from the
IMF recently released, as of the second
quarter of 2017, RMB reserves held by other
countries rose to USD 99.36 billion, up by
9.5% compared with the end of 2016 and
accounting for 1.07% of the total. On March
31, the COFER report listed the holdings of
RMB foreign exchange reserves for the first
time. Eight currencies are now separately
listed, namely, the US dollars, Euros, RMB,
Yen, Pound, Australian dollar, Canadian
dollar, and Swiss francs. All other currencies
are grouped under "other currencies".
5. The domestic capital market is
opening up further
According to statistics from the State
Administration of Foreign Exchange (SAFE),
the approved quota for RQFII totaled RMB
589.5 billion as of September 29, up by RMB
4.6 billion compared with a month ago, with a
total of 191 qualified foreign institutional
investors having been approved. At the same
time, the approved quota for QFII totaled
RMB 94.5 billion as of September 29, up by
RMB 0.5 billion compared with a month ago,
with a total of 287 qualified foreign
institutional investors having been approved.
In addition, the approved quota for QDII
totaled RMB 90 billion as of September 29,
with a total of 132 qualified foreign
institutional investors having been approved.
No new quotas were approved in the past 22
months.
Policy and Peers Updates
Offshore RMB Express 3
PBOC scrapped reserve requirement on
foreign exchange trading
The People’s Bank of China (PBOC) removed reserve requirement of 20% for
settling foreign exchange forward yuan positions with effect from September 11.
Meanwhile, the supervision on the reserves put aside by offshore financial institutions
was also loosened. According to Sun Guofeng, head of the PBOC financial research
institute, amendments on the aforementioned measures were needed as the current
market environment greatly changed. Some comments argue that the move would
significantly reduce the cost for RMB forward trading activities, mitigating appreciation
pressure on the RMB.
S&P cut sovereign credit ratings of China and Hong Kong, respectively
The Standard & Poor's rating agency cut China’s long-term sovereign credit ratings
by one notch to ‘A+’ from ‘AA-’ on September 21, saying its prolonged period of strong
credit growth has increased its economic and financial risks. S&P also expected China's
economic growth to remain strong at close to 5.8% or more annually through at least
2020. S&P has also slashed Hong Kong's top-notch credit rating to AA+ from the highest
AAA, citing Hong Kong had very strong institutional and political linkages with China and
warning of potential spillover risks the mainland's ballooning debt pile.
Commercial banks would be eligible for targeted RRR cut if supporting
small and micro companies
On September 28, the State Council of China announced that commercial banks will
be eligible for a lower reserve requirement ratio (RRR) or re-lending support if their total
or increase of loans granted to small and micro companies, agriculture businesses or
secured loans for startups reaches a certain threshold. However, each small and micro
company should have less than RMB 5 million in lines of credit.
Policy and Peers Updates
Offshore RMB Express 4
RMB and KHR interbank regional trading was officially launched
The China Foreign Exchange Trading Center officially kicked off RMB and
Cambodian Riel (KHR) interbank regional trading on September 13. On the first trading
day, transaction amount reached KHR 1.05 billion (equivalent to RMB 1.68 million). Bank
of China, Industrial and Commercial Bank of China, Agricultural Bank of China, China
Construction Bank, Bank of Communications, Guangxi Beibu Gulf Bank and Guilin Bank
were first batch of participating banks and price quoting banks for the transactions.
BOCHK issued panda bonds
Bank of China (Hong Kong) successfully issued RMB 9 billion of panda bonds on
September 14. The bonds carried a coupon rate of 4.4% with maturity of 1 year. The total
amount subscribed was RMB 15 billion, or about 1.67 times of the issued amount. RMB
funds raised from the bonds will be used for offshore general working capital purpose,
including supporting corporations going global. On the same day, HSBC (China) also
issued RMB 2 billion worth of bonds with maturity of 3 years. Over one-third of the issued
amount was sold to offshore investors through the “Bond Connect”.
Special Topics
Offshore RMB Express
Due to the launch of Bond Connect, the widening spread of China and US interest
rates, and the appreciation of the RMB’s exchange rate, foreign capital flows into the
Mainland bond market have increased significantly since August. As of August 31, the
value of RMB bonds held by foreign institutions amounted to RMB 965 billion, hitting a
record high. During the first 8 months of this year, foreign institutions increased their
holdings of RMB bonds to RMB 165.2 billion, amongst which Negotiable Certificates of
Deposit (NCD) and Treasury Bonds are most attractive with cumulative newly-added
holding of RMB 88.3 billion and RMB 74.1 billion, respectively. At present, the value of
RMB bonds held by foreign institutions accounted for 1.49% of the total outstanding value
of the Mainland’s bond market, rising from 1.32% at the beginning of this year.
Kam LIU, Analyst
Multiple Factors Boost Foreign
Demand for RMB bonds
5
Firstly, Bond Connect allows foreign
investors easy access to the Mainland's
bond market.
July witnessed the rise in the proportion of
foreign institutions in the Mainland’s bond
market, which should be attributable to the
Bond Connect program. In July, the launch of
Bond Connect allowed overseas investors
easy access to RMB bonds, which heightened
their interest in entering the Mainland’s bond
market. The program’s alignment with
international trading habits such as settlement
mechanism and trading platform drew in
foreign investors.
The average weekly settlement amount
through Bond Connect was RMB 1.4 billion,
and the average weekly settlement number
was 32 in July, indicating that foreign
institutions remained positive on trading
through Bond Connect. It is almost certain that
the Bond Connect program hasn’t fully played
its role at this juncture. In August, increased
holdings of NCD through the platform totalled
about RMB 27 billion, accounting for 40% of
total holdings of NCD by foreign institutions.
This means that nearly 60% of the holdings of
NCD went through traditional channels such as
CIBM and QFII. However, Bond Connect will
likely play a greater role in the future when
Special Topics
Offshore RMB Express 6
overseas institutions become more familiar
with the platform as issues related to tax
arrangements, risk hedging, and credit rating
are gradually addressed. At present, the
share of foreign institutions in the Mainland’s
bond market is less than 2%, while the
weight of the RMB in the SDR basket of
currencies is 10.92%. If that is the goal,
trillions of yuan in capital inflow to the
Mainland’s bond market is possible in the
future.
Secondly, the widening interest rate
gap lures foreign investors and
makes NCD most attractive.
The fast-growing Chinese economy in
the first half of the year and the unexpected
pick-up in manufacturing PMI in August
strengthened market confidence. Although
economic data are likely to slow in the
second half, China’s economy has been
optimized in both growth and structure. In
addition, China’s regulatory policy on NCD
was executed orderly in August. Regulators
included NCD to the Macro Prudential
Assessment (MPA) system and imposed
tighter control on China’s public-offering
funds by restricting their investment scope
and proportion. Both fundamentals and
policy pushed up the yield of NCD of various
maturities by roughly 30 bps to 70 bps.
Higher yields make NCD more attractive.
Data showed that newly-added holdings of
NCD by foreign institutions in August were
nearly 6 times the size of newly-added
holdings of Treasury Bonds, which is unusual.
Against the backdrop of tighter regulation,
most of the NCD circulating in the market
could be of shorter duration and higher
quality in the future, which would help
improve foreign investor’s confidence in this
kind of assets. Foreign institutions will likely
gradually strike a balance in their allocation
to Treasury Bonds and NCD.
Special Topics
Offshore RMB Express 7
On the contrary, US President Trump
confounded leaders from his party by siding
with Democrats on plans to fund the
government and raise the debt ceiling,
postponing the discussion on debt ceiling by
3 months to December. The urgency of time
and Trump’s worsening relationships with
Republicans are likely to affect the tax reform
process. In addition to the uncertainty of
Trump’s policy, sluggish inflation
expectations also affected the interest rate
hike pace, resulting in lower US bond yields.
The spread between China and US 1-year
Treasury bond rose from 150 bps at the end
of last year to 220 bps currently. The spread
between China and US 10-year Treasury
bond widened to over 150 bps, much higher
than the historic average of 120 bps. Clearly,
the continuing expansion of China-US
interest rate spread attracts foreign investors
to RMB bonds.
Thirdly, appreciation of the RMB
improves the value of RMB bonds as
an asset class.
Since the beginning of this year, RMB
has rallied close to 6-7%, increasing foreign
investor’s confidence in RMB assets. The
RMB strengthened earlier this year because
the strong Euro led to a soft greenback.
Since August, the rebounding RMB
increased domestic demand for foreign
exchange settlement and changed market
expectations, which further reinforced its
upward trend. Subsequently, the RMB
weakened after the PBOC suspended a
requirement known as the foreign exchange
risk reserve ratio, no longer requiring foreign
banks to set aside reserves for offshore RMB
deposits in China. At this juncture, RMB has
no basis for either one-way appreciation or
depreciation, so two-way fluctuation and
more flexibility of the RMB will remain the
main trend in the future.
In the medium term, the RMB’s
exchange rate mainly depends on the
Mainland’s fundamentals and changes in the
international environment. Although the
market generally believes that China’s
economy will slow down in the second half of
the year, China’s economy has been
optimized in both growth and structure.
Special Topics
Offshore RMB Express 8
Adding improving international payments, the
RMB is likely to stabilize. On the international
side, in light of strong economic recovery in
Europe, the European Central Bank raised
its GDP forecast for 2017 to 2.2 percent in its
latest monetary policy meeting, the fastest
rate since 2007. According to ECB Governor
Mario Draghi, the Governing Council will
make the bulk of its decisions on tapering
quantitative easing program in October,
resulting in the market’s speculation that the
ECB will announce the QE withdrawal
timeline at the next meeting. If so, long-term
rate spread between US and German may
narrow, and the pattern of a strong Euro and
a weak greenback will continue in the second
half. Against this backdrop, a stable and
even moderately strong RMB can be
expected, which will enhance confidence of
foreign institutions on RMB assets.
Special Topics
Offshore RMB Express 9
The RMB’s Main Trend of Stability
and Moderate Strength
Jian YING, Senior Economist
Recently, volatility of the RMB’s exchange rate has increased significantly. Since the
beginning of July, the RMB’s exchange rate, especially the onshore rate (CNY), rose
sharply and led to a substantial rebound in the offshore rate (CNH). On September 8, the
intraday high of CNY was 6.4346, the highest level since December 2015. In terms of
closing prices on September 8, the cumulative appreciation of CNY and CNH were both
6.7% since the beginning of this year, less than 14.4% for the Euro and 7.8% for the Yen.
However, the appreciation of the RMB in the short term was no less than that of other
currencies, as CNY rebounded 4.6% between the end of June and September 8, keeping
pace with the Euro and the Yen.
After "8.11", The market’s another
concern is, since September 8, the RMB’s
exchange rate has suddenly reversed its
upward trend and gradually stabilized. In the
weekend, the People's Bank of China
announced the adjustment of the foreign
exchange risk reserve policy and no longer
required foreign banks to set aside reserves
for offshore RMB deposits in China. On
September 11 (Monday), the daily
depreciation of CNY amounted to 481 pips.
On September 21, the RMB’s central parity
rate fell by 870 pips, while both CNY and
CNH depreciated by 1.4%.
How should one make sense of the
recent fluctuations of the RMB’s exchange
rate and its future trends? I would like to
share the following thoughts for reference.
Special Topics
Offshore RMB Express 11
1. The recent acceleration of the
RMB’s appreciation mainly reflects
changing market expectation and
increasing domestic demand for foreign
exchange settlement. After "8.11", both the
onshore and offshore markets were
preoccupied by irrational investment
behaviors. Domestic demand for foreign
exchange purchases surged, and RMB funds
flew out of the Mainland, creating strong
selling pressure in the onshore and offshore
market. This year, the RMB’s exchange rate
has stabilized, and market confidence has
gradually increased, bring order to the
offshore market. In this case, a large number
of RMB short positions are unwound. As
China’s economy began to recover, capital
outflows have been contained, and domestic
enterprises are speeding up foreign
exchange settlement, thus pushing up the
RMB’s exchange rate in the short term.
2. There are subtle changes in the
European and the US monetary policy,
and changing fortunes of the Euro and
USD further contributed to the rise of the
RMB’s exchange rate. Although the Fed is
to shrink its balance sheet and is expected to
continue raising interest rates, US economic
growth is moderate and inflationary pressure
is tame, resulting in a moderate pace of rate
hikes by the Fed. On the other hand,
economic growth of the Eurozone has further
accelerated, and the market expects the
European Central Bank to announce the
reduction of debt purchases at the next
monetary policy meeting. The delicate
situation in North Korea also leads safe
haven demands into the Euro and other non-
USD currencies, supporting a strong rebound
in the Euro. The RMB was one of the non-
USD currencies that have appreciated due to
dollar weakness.
14
Special Topics
Offshore RMB Express 13
3. Further appreciation of the RMB
may outpace fundamentals, creating
negative impacts and running counter to
the goal of maintaining a stable RMB.
From July to early September, CNY
appreciated accumulatively by 3,000 pips
and was up by more than 2100 pips during
the 11 trading days from August 25 to
September 8. Such magnitude of
appreciation was rare in recent years. For
most exporters, the sharp appreciation of the
RMB will erode their meager profits,
eventually leading to a decline in export
competitiveness. At the beginning of the year,
some companies accumulated USD, but
appreciation of the RMB has exceeded the
range of their hedges, resulting in huge
exchange losses. At the beginning of the
year, the PBOC believed the RMB had the
hallmarks of a strong currency, but under the
premise of maintaining its basic stability.
Thus the majority of market participants may
not welcome the recent trend.
4. Parts of the macro adjustment
policies are rapidly adjusted in response
to market changes, which will balance
supply and demand and pull the
exchange rate back on track. The Mainland
has continuously improved the RMB’s
exchange rate mechanism, and domestic
and foreign market participants have become
increasingly rational. However, it will still take
a long time to make the RMB market as
mature as major currency markets such as
Europe and United States. The recent
appreciation of the RMB could have led to
herd behavior of foreign exchange settlement
and a new round of one-way expectation.
The PBOC decided to adjust the foreign
exchange risk reserve policy to reduce the
cost of foreign exchange purchases and
increase demand for the US dollar. Also,
foreign banks are no longer required to set
aside reserves for offshore RMB deposits in
China, which will release RMB to overseas
markets, increasing overseas RMB supply.
These are important measures to contain the
appreciation of the RMB. Recent
performance of the RMB showed that such
measures did produce a significant effect.
Special Topics
Offshore RMB Express 14
Regarding the outlook of the RMB’s
exchange rate, firstly, the pattern of
increased volatility has been established.
From hovering around 6.9 at the beginning of
the year to fluctuating between 6.7 and 6.9 at
mid-year, and then falling quickly back to 6.6
after temporarily rising to 6.4 in September,
the RMB may fluctuate in a wider range in
the future. Secondly, following a number of
reversals between appreciation and
depreciation, short and long positions are
expected to coexist in the market, which will
reduce the likelihood of one-way appreciation
or depreciation of the RMB. Finally, the
economic fundamentals still determine the
trend of the RMB’s exchange rate. As
China’s economy continues to maintain rapid
growth, while the Fed may slow the pace of
interest rate hikes and the Euro strengthens,
the RMB’s exchange rate will likely remain
stable and moderately strong.
Chart Book
Offshore RMB Express
Market Indicators
15
Hong Kong RMB Deposits (in RMB bn) RMB Cross-border Trade Settlement (RMB bn)
USD-CNH and USD-CNY Exchange Rates
Source: HKMA Source: HKMA
Source: Bloomberg
0
200
400
600
800
1000
1200
01/10 01/11 01/12 01/13 01/14 01/15 01/16 01/17
Aug:532.8bn
End of Sep:
Chart Book
Offshore RMB Express 16
CNH HIBOR Fixing (%) Hong Kong Offshore RMB Bond Issuance (RMB bn)
CNH & CNY China Sovereign Curve (%, 29 Sep 2017)
FTSE-BOCHK Offshore RMB Bond Composite Index
Source: Bloomberg
Source: Bloomberg Source: Bloomberg
Source: BOCHK Global Market estimate
End of Sep:
End of Sep:
Chart Book
Offshore RMB Express 17
RMB Clearing Transaction Value (RMB tn)
SWIFT World payments currency ranking & market share
Source: HKICL
Source: SWIFT
December 2015 August 2017
43.89% USD #1
EUR 29.39% #2
GBP 8.43% #3
JPY 2.78% #4
1.94% CNY
EUR 32.91% #2
GBP 7.05% #3
JPY 3.01% #4
#5 2.31% #5 CNY
CAD #6 1.70%
USD #1 40.72%
1.75% #6
CHF #7 1.63%
AUD #8 1.50%
CAD
Disclaimer: This report is for reference and information purposes only. It does not
reflect the views of Bank of China (Hong Kong) or constitute any investment advice.
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