CNH Spore and Twan Style 130219

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CNH: Singapore and Taiwan style February 19, 2013

CNH: Singapore and Taiwan style

DBS Group Research 19 February 2013

Nathan Chow (852) 3668 5693 [email protected]

Interest rate strategy

Singapore has long-prepared for, and iswell equipped tofacilitate RMBtrading

Having given Hong Kong a good eight-year head start, China is now turning toother regional partners to launch the next phase of RMB internationalization.Each partner is selected to perform different roles, as explained below.

Singapore: a gateway to Southeast Asia

On 8 February, the People's Bank of China announced that the Industrial andCommercial Bank of China (Singapore) will become the RMB clearing bank inSingapore. This appointment was widely expected as Beijing indicated a Chinese

clearing bank will be designated in the city-state in a top bilateral meeting heldlast year. Singapore has long-prepared for and is well equipped to facilitateRMB trading. The Singapore Exchange has laid the ground for the listing ofRMB-denominated securities. As Asia's second largest FX trading center, Singaporehouses many multi-national corporations' treasury centers as well as offshoretrading operations. Once the clearing mechanism is set up, there will be greatertransparency in the movement of RMB funds. Market confidence in acceptingRMB for trade settlement will increase. In turn, this will encourage more participationfrom corporations and banks, potentially increasing the range of RMB investmentproducts.

To seize the rapidly growing pie, banks in Singapore began offering RMB bankingservices a few years ago. As of June 2012, the pool of RMB deposits in Singaporereached RMB60 billion. RMB flows in Singapore have been buoyed by the healthygrowth of trade and financial linkages with the mainland. China was Singapore'sthird-largest trading partner; totaltrade between the two countriesreached SGD104 billion in 2012,up 37% since the 2008 global crisis.Excluding China and Hong Kong,Singapore currently handles thelargest share of RMB paymentsin Asia (Chart 1).

Aside from financial infrastructureand economic ties, Singaporepossesses a key geographical

advantage. As the gateway to theSoutheast Asia, it provides a platformfor Beijing to facilitate wider useof the RMB in China-ASEAN trade. In 2012, ASEAN exports to China grew toUSD195.8 billion from USD22.2 billion in 2000; surpassing Japan to become China'ssecond largest importing region (Chart 2). China's imports from ASEAN includemainly commodities and raw materials such as petrol and timber. China's demandfor commodities is expected to remain strong going forward and China is happyto see more trades settled in RMB. Furthermore, as the RMB's regional influencecontinues to grow, the RMB clearing line will be utilized by not just Singaporebut its trade partners too. This is a great opportunity for Beijing to promote the"third party" usage of the RMB (trades not involving China), a major attributeof any international currency.

Position Country Weight

#1 United Kingdom 28.3%

#2 Singapore 22.7%

#3 Australia 8.2%

#4 France 7.2%

#5 Luxembourg 4.3%

Chart 1: RMB share in payments value

As of Dec 2012 (Excluding China and Hong Kong)


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A major objective tocreate a RMB clearingline in Taiwan is toallow Taiwansmanufacturers toinvoice and settle theirmainland tradesdirectly in RMB

Taiwan: a local hub for RMB settlement and trading

Two days before the Singapore's announcement, financial institutions in Taiwanformally launched their RMB business after signing currency clearing agreementswith Bank of China's Taipei branch. Previously, Taiwan's banks were only allowedto undertake RMB transactions through their offshore banking units. The latestdevelopment opens up the RMB business to the domestic banking units, whichis ten times bigger than the offshore counterpart. As yield spread for RMB businessis far more attractive than that of TWD, local banks have been aggressivelyattracting RMB deposits. In the first week of launching their RMB business,

some banks offered up to 1.5% for demand deposits and 3.5% for 3-monthtime deposits, while others waived the service charges for depositing RMB cash.

We are confident about the initial build-up of RMB liquidity pool in Taiwandue to strong cross-strait economic ties. Over the past decade, bilateral tradebetween Taiwan and China surged fivefold; growing from USD32 billion in 2001to more than USD160 billion in 2012. The mainland is now the top tradingpartner of Taiwan that contributes largely to its trade surplus. By early-2014,Taiwan's RMB liquidity pool may reach RMB140 billion, about 2% of local deposits.It comprises of (1) 12% of Taiwan's bilateral trade surplus with the mainland tobe settled in RMB (RMB70 billion)1; (2) RMB deposits currently held by Taiwanoffshore banking units (RMB21.5 billion); (3) transfer of RMB deposits maintainedby Taiwanese entities currently in Hong Kong (est. RMB50 billion).

Due to its heavy reliance on the manufacturing sector, Taiwan and China haveestablished a RMB clearing system. This will allow Taiwan's manufacturers invoiceand settle their mainland trades directly in RMB, rather than swapping fromRMB to USD first before final conversion to NTD. Taiwan's manufacturers willbenefit from less exchange rates associated with USD volatility. They will alsobenefit from lower transaction costs. Also, Taiwanese enterprises operating inChina are now able to repatriate their RMB funds back to Taiwan. Since a significantshare of such monetary transfer was made through unofficial channels due toChina's tight capital controls, the newly-established clearing mechanism wouldbring many of the underground activities across the Strait to the surface.

As for the financial sector, the growth of RMB liquidity pool may open up theavenue for RMB-denominated wealth management businesses in Taiwan. However,unlike Singapore, Taiwan is yet an international financial hub. Such RMB businessand products would hence be primarily offered to the local investors.

0

50,000

100,000

150,000

200,000

250,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

China's imports from ASEAN

China's imports from EU

China's imports from Japan

USD mn

Chart 2: ASEAN surpassed Japan to become Chinas No.2 importing region in 2012


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Hong Kong iscurrently handlingmore than 80% ofall RMB paymentsand receiving over50% of all LC sentby banks in China

With respect to the RMB-denominated bond market, some issues need to beaddressed first before it can thrive. For instance, a credit rating of BBB or higheris currently required to be listed on the Taiwan's international board. Meanwhile,Chinese enterprises and financial institutions are prohibited from issuing debtin Taiwan. These could be serious hurdles to the market development as Chinese

names are the majority of issuers of dim sum bond (Chart 3) and most of themare unrated. A stalled RMB-denominated bond market will rein in RMB businessdevelopment in other sectors such as banks, asset funds and insurance companiesas they are the traditional bond buyers based on Hong Kong's experience.

Hong Kong's dominant role to remainGiven that RMB is fungible offshore, the emergence of new offshore centressimply expands the existing regime instead of creating competing systems. Assuch, we do not expect the recent development to have much impact on HongKong; especially when the market is already relatively mature after eight yearsof development. Being an important entrepot of the mainland, Hong Kong iscurrently handling more than 80% of all RMB payments and receiving over50% of all letters of credit sent by banks in China (Chart 4). As a result, HongKong banks are taking the major share of RMB deposit flows from the mainland.The large RMB liquidity pool fuels the RMB-denominated financial productsmarket. According to our newly-lunched DBS RMB Index for VVinning Enterprises(DRIVE), corporates' interest in RMB usage in growing and companies find RMBhedging products useful2.

Apart from geographical proximity,Hong Kong also enjoys politicalsupport from Beijing. China's 12thFive-Year Plan states clearly thatBeijing is in full support of HongKong's development as an offshoreRMB center, highlighting itsprominence in the process of RMBinternationalization.

10%

24%

8%

8%12%

37%

1%

Chinese bank

Greater China corp

Foreign bank

Foreign corp

Sovereign

CD

Supranational

Chart 3: Breakdown for dim dum bond issuers

China --> Hong Kong 53.8%

China --> Singapore 19.0%

China 11.7%

China --> Rest of Asia 8.6%

China --> EMEA 3.2%

Date: 31/5/2012

Chart 4: Letters of Credit (Transaction value)


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Most importantly, Beijing wants to relax the currency controls without creatingunforeseen negative consequences. Hong Kong, as a Special Administrative

Region of China under the framework of one country two systems, serves thisgoal well.

Meanwhile, there had been deregulations to enhance the competitiveness inHong Kong's RMB business over the past year. To provide greater flexibility forHong Kong banks to manage their RMB exposure, banks' net open positionsand statutory liquidity requirement have been liberalized several times lastyear. Since July 2012, banks in Hong Kong are allowed to offer RMB services tonon-resident personal customers, and currency conversion is not subject to correspondinglimits for Hong Kong residents. These put Hong Kong on a level playing fieldwith other cities offering RMB services.

Notes:

1. 12% of Chinas total trade was denominated in RMB in 2012

2. DBS RMB Index for VVinning Enterprises (DRIVE); http://hk.dbs.com/en/enterprise/rmb/


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The information herein is published by DBS Bank Ltd (the Company). It is based on information obtained from sources believed to bereliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness orcorrectness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained hereindoes not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. Theinformation herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgementby addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individualsconnected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss ordamages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent orotherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. Theinformation herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or otherfinancial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/oremployees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform orseek to perform broking, investment banking and other banking or financial services for these companies. The information herein is notintended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary tolaw or regulation.

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CNH Spore and Twan Style 130219