Offshore Renminbi – One Year On - paris-europlace.net offshore growth RMB 622 billion of deposits in Hong Kong at 30 September 2011; now ... India Taiwan Japan Sweden Spain Italy

Offshore Renminbi – One Year On

Andrew Malcolm

November 2011

1

Rapid offshore growth

RMB 622 billion of deposits in Hong Kong at 30 September 2011; now forecast to approach RMB 1 trillion by year end

Second quarter 2011, 10% of China’s trade settled in RMB (first quarter 2010: 0.5%)

Some analysts predict one-third to one-half of China’s trade could be settled in RMB by 2015

RMB Deposits in Hong KongJuly 2010 – Sept 2011

7006005004003002001000

RMBbillion

2

Dim sum on the menu!

The so-called dim sum bondmarket is thriving

> 2010: RMB36bn of bonds from 16 issuers

> 2011 to August: RMB70bn of bonds from over 30 issuers

Derivatives market developing

> CNY(HK) deliverable spot/forwards; swaps vs USD

> ISDA publishes draft disruption events: June 2011

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Dim sum….

4

Dim sum….off the menu!

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A new eurocurrency

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August 2011: new initiatives

Signing RMB 20 billion PRC sovereign bonds in Hong Kong, Vice Premier Li Keqiang announces

> Expansion of trade settlement scheme to whole of China

> Streamlined process for onshore remittance of proceeds

> Pilot relaxation of some capital account items

Significant affirmation of internationalization policy

Some are more pessimistic…

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Doubters…

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“In growing desperation to find a solution…to the balance of payments, the authorities have begun clutching at straws. The most notable one is a hope that the yuan itself could be made a world reserve currency…The quick fix straw-clutching idea has failed.”

Money, SCMP September 2011

Doubters…

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What next?

Doubts about internationalization focus on:

-Concentration of the market in Hong Kong: other settlement centres?

-Can trade in RMB expand beyond HK/PRC transactions: other clearing agreements?

-What happens if the offshore currency is illiquid or unavailable?

- The PRC’s chronic trade surplus: isn’t a deficit needed to internationalize?

- The absence of free convertibility

- Continued capital controls

Other settlement centres?

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Other renminbi hubs?

Singapore aims to be renminbi hubSingapore has made a bid to become the first overseas hub for trading renminbi, marking a new stage in the internationalization of the Chinese currency.

The Monetary Authority of Singapore said Beijing would soon appoint a Chinese bank to clear renminbi in the city state – a move that would enable Singaporean banks to directly access onshore renminbi rather than having to route transactions via Hong Kong or commercial banks on the Mainland.

FT.com, 19 April 2011

13

Other renminbi hubs?

China to back London as offshore renminbi centre

China is for the first time to give formal backing to moves by British banks to turn the City of London into an offshore trading centre for the renminbi, UK government officials have told the Financial Times.

FT, 8 September 2011

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Pool or puddles?

Could there be other offshore pools? Is there anything special about CNH?

Yes, other pools are possible: if PBOC signs other clearing agreements!

The danger is that this would result in a series of offshore puddles, rather than a single offshore pool.

or ?

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Individual / business / corporate

accounts

173 banks in HK RMB RTGS

Settlement of offshore RMB

Transfers

Transfers

Omnibus Client AccountDeposits with PBOC

Clearing Agreement

Fiduciary Accounts Settlement Accounts

PBOC

BOC HKTransfers

FA SA

Onshore

Offshore

Transfers

Transfers in the Global Offshore Pool are settled with BOC HK

FA looks through to PBOC

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accounts



Transfers

Transfers


Clearing Agreement


PBOC

BOC HKTransfers

FA SA

Offshore

Transfers



PRC Bank

Clearing agreement:

Central bank money

Capital controls enforced

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accounts



Transfers

Transfers


Clearing Agreement


PBOC

BOC HKTransfers

FA SA

Onshore

Offshore

Transfers



All transfers settled across the books of BOC HK

Commercial bank money

No FX controls

Scaleable worldwide

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Global Implications

Montreal

New York

Los Angeles

Argentina

Sydney

RMB accounts are now being opened worldwide173 banks in RMB Real Time Gross Settlement

JakartaSingapore

Kuala Lumpur

Ho Chi Minh City

Bangkok

SeoulAnkaraLondon Frankfurt

Brazil

Abu Dhabi

South Africa

IndiaTaiwan

Japan

Sweden

SpainItaly

France

Netherlands

Switzerland

London

Direct member RMB RTGS

Access via Hong Kong branch

Abu Dhabi

Zambia

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Individual / business /corporate accounts

173 banks in HK RMB

RTGS Transfers

Transfers


ClearingAgreement


PBOC

BOC HKTransfers

FA SA

Onshore

Offshore

Transfers

“CNS” offshore pool

[??? SG]SA FA

Cross Pool Settlements?

ClearingAgreement

OmnibusClientAccount

Fiduciary AccountsSettlement Accounts

Banks[SG RMB

settlement?]

Individual/Business/corporateaccounts



Transfers

Transfers

“CNH” offshore pool

Transfers


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173 banks in HK RMB

RTGS Transfers

Transfers


ClearingAgreement


PBOC

BOC HKTransfers

FA SA

Onshore

Offshore

Transfers


[??? SG]SA FA

ClearingAgreement



Banks[SG RMB

settlement?]




Transfers

Transfers


Transfers

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173 banks in HK RMB

RTGS Transfers

Transfers


ClearingAgreement


PBOC

BOC HKTransfers

FA SA

Onshore

Offshore

Transfers


[??? SG]SA FA


ClearingAgreement



Banks[SG RMB

settlement?]




Transfers

Transfers


Transfers


Settle in central bank money?

Means going back onshore.

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173 banks in HK RMB

RTGS Transfers

Transfers


ClearingAgreement


PBOC

BOC HKTransfers

FA SA

Onshore

Offshore

Transfers


[??? SG]SA FA


ClearingAgreement



Banks[SG RMB

settlement?]




Transfers

Transfers


Transfers


Possible still to settle offshore??

What if more pools?

What if there is no more offshore renminbi?

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What if the pool dries up?

What if, at maturity, the borrower is unable to repay in offshore RMB?

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What if no CNH?

What would happen?

> Nature of event

> Illegality? Inconvertibility; non-transferability

> Public policy?

> Impossibility? Illiquidity

> Applicable law: governing law; place of performance; law of currency

> Available solutions

> Breach/event of default

> Frustration of contract (and restitution?)

> Suspension of payment obligation

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What if no CNH?

What would happen?

> Nature of event

> Illegality? Inconvertibility; non-transferability

> Public policy?

> Impossibility? Illiquidity

> Applicable law: governing law; place of performance; law of currency

> Available solutions

> Breach/event of default

> Frustration of contract (and restitution?)

> Suspension of payment obligation

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What if the pool dries up?

What is the purpose of the fallback?

> permit/require repayment in a freely convertible currency

> avoid breach, technically incurable event of default

A fallback for a bond must

> be certain and robust

> avoid optionality

> tackle the offshore spot rate issue

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Fallback clauses

Two basic approaches now available:

> The “three triggers” clause

> Inconvertibility; Non-Transferability; Illiquidity

> Constrains issuer

> Borrowed from derivatives practice

> Match with issuer hedge?

“ Specified Triggers ” Type“(j) Payment of US Dollar Equivalent

Notwithstanding the foregoing, if by reason of Inconvertibility, Non-transferability or Illiquidity, the Issuer is not able, or it would be impracticable for it, to satisfy payments of principal or interest (in whole or in part) in respect of Notes when due in Renminbi in Hong Kong, the Issuer may, on giving not less than five or more than 30 days’ irrevocable notice to the Noteholders prior to the due date for payment, settle any such payment (in whole or in part) in US dollars on the due date at the US Dollar Equivalent of any such Renminbi denominated amount.

For this purpose:

"Illiquidity" means the general Renminbi exchange market in Hong Kong becomes illiquid as a result of which the Issuer cannot obtain sufficient Renminbi in order to satisfy its obligation to pay interest and principal (in whole or in part) in respect of the Notes.

"Inconvertibility " means the occurrence of any event that makes it impossible for the Issuer to convert any amount due in respect of the Notes in the general Renminbi exchange market in Hong Kong, other than where such impossibility is due solely to the failure of the Issuer to comply with any law, rule or regulation enacted by any Governmental Authority (unless such law, rule or regulation is enacted after [Issue Date] and it is impossible for the Issuer, due to an event beyond its control, to comply with such law, rule or regulation).

"Non-transferability " means the occurrence of any event that makes it impossible for the Issuer to deliver Renminbi between accounts inside Hong Kong or from an account inside Hong Kong to an account outside Hong Kong, other than where such impossibility is due solely to the failure of the Issuer to comply with any law, rule or regulation enacted by any Governmental Authority (unless such law, rule or regulation is enacted after [Issue Date] and it is impossible for the Issuer, due to an event beyond its control, to comply with

such law, rule or regulation.

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Fallback clauses

> The “not available” clause

> Modified form of existing generic global bond programme condition

> Already common in many programmes

> Arguably more robust

> Short!

“Unavailability” Type

“Currency of Payment: If the Specified Currency is… [, in the reasonable opinion of the Calculation Agent,] not expected to be available [to the Issuer], when any payment on this Note is due as a result of circumstances beyond the control of the Issuer,….

Fallback clauses

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Additional Disruption Event Provisions for an Offshore Deliverable CNY Transaction – ISDA, 14 October 2011

> Builds on 1998 FX and Currency Derivatives Option Definitions

> For use in derivatives transactions

> Context of derivatives versus issuer/bondholder relationship

> Fallback first to “Settlement Postponement”; then Non-Deliverable Substitute

> Matching bonds and swaps – not straightforward!

> See ICMA Guidance Note 17; especially section 3.

(Almost) convertible

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Trade liberalization : from August 2011

No approval required for RMB trade settlement with the world

From July 2010: 20 provinces in China…Almost 70,000 registered enterprises

From August 2011: the whole of China

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Cross-border use of proceeds

Capital account

Current account

Capital contribution

Goods

Loan Services

Acquisition (purchase price)

Dividends

No Approvals

RequiredApprovalsRequired

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Wall or Dam?

An internationalized renminbi is convertible on current account; and convertible in the offshore market.

Capital controls are needed primarily to prevent capital inflows: a wall to keep “hot money” out.

But could a trade surplus be offset by a capital account deficit? An opening of the capital controls dam for outbound investment – in renminbi?

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Questions?

Documents

Offshore Renminbi – One Year On - paris-europlace.net offshore growth RMB 622 billion of deposits in Hong Kong at 30 September 2011; now ... India Taiwan Japan Sweden Spain Italy