Offshore RMB Express - Bank of China...Market Review Offshore RMB Express 1 I. China-US trade talk stalled in the first stage, CNH hovering between 7 and 7.03 On November 8, the market

Offshore RMBExpress

Issue 70 ‧Dec 2019

Contents

Part 3

Part 4

Part 1

Special Topic

Chart Book

Market Review

Part 2 Policy and Peers Updates 5

7

1

Editors：Annie CheungTel ：+852 2826 6192Email : [email protected]

Sharon TsangTel ：+852 2826 6763Email: [email protected]

Leo SunTel：+ 852 2826 6586 Email: [email protected]

10

Market Review

Offshore RMB Express 1

I. China-US trade talk stalled in thefirst stage, CNH hovering between 7and 7.03

On November 8, the market rumored

that China and the US agreed to roll back

tariffs in the first phase of the trade

agreement. CNH rose to 6.97 in response.

Trump subsequently stated that tariff roll

back was not included in the agreement, and

CNH fell below 7 again. Subsequently, trade

talks were in stalemate, with CNH hovering

between 7 and 7.03. As of November 29, the

central parity rate of RMB against the US

dollar was 7.029, up 0.3% from the previous

month; CNH closed at 7.0328, up 0.2% from

the previous month, and down 2.2% from the

beginning of the year; CNY closed at 7.0326,

up 0.1% from the previous month, and down

by 2.1% from the beginning of the year.

In terms of CNH HIBOR, on November

29, the O/N, 1-week, and 3-month CNH

HIBOR rates were 2.696%, 2.977% and

3.422%, respectively.

In November, CNH fluctuated between 6.97 and 7.03. On November 8, the market

rumored that China and the US agreed to gradually roll back tariffs in the first phase of the

trade agreement. CNH rose to 6.97 in response. Trump announced shortly afterwards that the

tariff roll back was not included in the agreement, and CNH fell below 7 and fluctuated between

7 and 7.03. Bond Connect trading volume continued to rise, breaking the monthly transaction

record again, with an average daily trading volume of RMB 17.9 billion. Foreign investors

purchased a net of RMB 11.7 billion. On November 7, the People's Bank of China successfully

issued two batches of RMB bills in Hong Kong, totaling RMB 30 billion.

Offshore RMB Market Developed Steadily

Market Review

Offshore RMB Express2

II. Offshore RMB businessindicators remained stable

By the end of October 2019, RMB

deposits in Hong Kong amounted to RMB

636.4 billion, up by 2.1% MoM and up by

3.1% YoY. RMB loans outstanding in Hong

Kong were RMB 150.2 billion, up by 6.2%

MoM and 23.6% YoY. The total remittance of

RMB for cross-border trade settlement was

RMB 429.4 billion, down by 6.3% MoM and

up by 27.9% YoY. RTGS turnover was RMB

21.9 trillion in November 2019, up by 5.9%

MoM. As of November2019, dim sum bond

issuance amounted to RMB 157.6 billion. As

for other offshore RMB markets, RMB

deposits in Taiwan totaled RMB 259.8 billion

(including negotiable certificates of deposit)

as of October 2019, down by 2.0% MoM.

According to SWIFT, RMB was the sixth

most actively used currency for domestic and

international payments by value in October

2019 with a share of 1.65%, down from

1.95% in September. RMB trailed behind the

following currencies: USD, EUR, GBP, JPY,

and CAD. RMB payments value decreased

by 12.3% compared to the previous month,

while other payment currencies increased by

4.2% in general.

III. Trading volume of Bond Connectcontinued to growIV.

In November, Bond Connect saw the

fastest growth in international client adoption

with 154 investors joining the Bond Connect

community, which now consists of 1,533

institutional investors. Bond Connect broke

record highs in monthly trading volume at

RMB 375.6 billion. The average daily

turnover was RMB 17.9 billion. Global

investors contributed to net purchase flow of

RMB 11.7 billion. Policy financial bonds,

Chinese government bonds, and NCDs

remained the focus of investors with turnover

of RMB 203.9 billion, RMB 113.2 billion, and

RMB 50.9 billion respectively, accounting for

54.3%, 30.1%, and 13.5% of monthly trading

volume. In terms of tenor, bonds with

maturity from 7 to 10 years remained the

most popular, taking up 44.4% of total

activities.

Market Review


IV. The People's Bank of Chinaissued two batches of RMB bills

On November 7, the People's Bank of

China successfully issued two batches of

RMB bills in Hong Kong, totaling RMB 30

billion, including RMB 20 billion 3-month bills

and RMB 10 billion 1-year bills, both pricing

at 2.9%. The People's Bank of China stated

that the issuance was welcomed by the

market. The total amount of bids exceeded

RMB 64 billion, which was 2.1 times the

amount of issuance. The subscription entities

included commercial banks, central banks,

international financial organizations, funds

and other offshore market investors from

Europe, the US, Asia and other countries

and regions.

Since November 2018, the central bank

has issued 13 batches of RMB bills totaling

RMB 160 billion. The term structure has also

expanded from 3-month and 1-year to new

tenors at 1-month and 6-month.

6

Policy and Peers Updates


The latest Greater Bay Area developmentmeasures will further promote cross-borderfinancing services

On November 6, the Leading Group for the Development of the Guangdong-Hong

Kong-Macao Greater Bay Area announced 16 measures that benefit the people of Hong

Kong, facilitating the convenient flow of people, goods and capital within the Greater Bay

Area. In particular, measures related to financial service industry are: 1. Support the use of

mobile electronic payment by Hong Kong residents in the Mainland; 2. Banks in Mainland

can open Types II or III Mainland personal bank accounts for Hong Kong residents remotely

by attestation, through their branches or holding entities in Hong Kong; 3. It is set to explore

the establishment of a two-way wealth management connect mechanism in a risk-controlled

manner with appropriate investor protection.

PBOC issued RMB bills in Hong Kong

On November 7, PBOC issued RMB bills through the Central Money Markets Unit of

the Hong Kong Monetary Authority. The issuance included RMB 20 billion 3-month bills and

RMB 10 billion 1-year bills, both priced at 2.9%.

MSCI announced the results of the November 2019 Semi-Annual Index Review on

November 7, and all changes will be implemented as of the close on November 26.

According to the statement, MSCI will implement the third step of the previously

announced weight increase of China A shares in indexes. 204 China A share stocks, 189

of which are mid caps, will be added to the MSCI China Index and the inclusion factor for

268 existing constituents will be increased from 15% to 20%. China A shares will have

weights of 12.1% and 4.1% in the MSCI China and MSCI Emerging Markets Indexes,

respectively.

MSCI further increased weight of China A shares in indexes

Special Topics

Offshore RMB Express

Mixed signals from RMB derivatives

Risk reversal on the offshore RMB

reflects the excess demand (as measured by

the difference in implied volatility) for call

options on USDCNH relative to put options

with the same delta and expiration date.

Since call options on the USDCNH reflects a

bearish sentiment on the RMB, a high level

of risk reversal signals high tail risk for the

RMB. As seen in the 3-months 25 delta risk

reversal chart below, the demand for option

market participants to short the RMB is much

weaker than during the height of trade

tensions at the beginnings of May and

August.

Weighing RMB with Derivatives

7

At the time of this writing (November 20th, 2019), more than five weeks havepassed since a phase one trade deal between US and China was announced onOctober 11th. However, due to the cancellation of the November 16-17th APECmeeting in Chile, and disagreements over whether previously imposed tariffs could berolled back before any fulfillment of trade agreements, an official deal has not beensigned. Consequently, USDCNY has been range-bound between 7.04 and 6.97 inNovember. To try to get a glimpse of market consensus for the near future, we trackreal-time views from the offshore derivatives market, which tends to be more forward-looking than the onshore market. Given the unpredictability of political outcomes suchas trade negotiations, we also estimate the RMB at various tariff scenarios to estimatethe range of RMB tail risk.

David Zhang, Senior Economist

Special Topic


While the directional bias of option

market participants is relatively low, the

uncertainty around the short-term RMB

outlook has edged up since November 12th,

when President Trump threatened to

increase tariffs “substantially” if no deal is

signed. As seen in the implied volatility term

structure chart below, 1-week implied

volatility for USDCNH went up to 5% on

November 18th from 4% on November 4th,

which was the day before news about China

asking for a rollback of Sep 1st tariffs came

out. While such a move is significant given

that the annualized volatility of USDCNY in

2019 YTD was only about 3%, current

anticipation of near-term volatility is far below

the 8-9% level seen on October 11th, when

news of a phase one deal was released.

Relative to the options market, bearish

sentiment in the forward market is less

pronounced at the moment. Market

sentiment is better gauged by the difference

between offshore and onshore forward points

for two reasons. First, forward points by

themselves also reflect changes in relative

interest rates as implied by interest rate

parity. Second, the offshore market is more

forward looking than the onshore market. As

seen in the offshore – onshore 3M forward

points vs. spot chart below, the bearish

sentiment of the offshore forward market

relative to the onshore market is low relative

to the beginning of May and August.

However, the bearish level did jump from

zero to 45 after Trump’s threat to raise tariffs

“substantially” on November 12th.

Special Topic


Estimating RMB at various tariffscenarios

There are two caveats behind the

estimation of RMB at various tariff scenarios.

First, there’s tremendous uncertainty behind

the probability of each scenario. Second,

estimated RMB levels could be more or less

due to second order effects on trade route

diversion and speculation. At the present

moment (November 20th, 2019), our

baseline tariff scenario is that tariffs planned

for December 15th are suspended, but

there’s no immediate rollback of previously

imposed tariffs. Under this scenario, the

USDCNY spot is likely to hover around 7.03,

which was the price that preceded the

November 4th news of China asking for a

rollback of imposed tariffs. RMB levels for

other trade scenarios could be estimated

based on the proportion of tariffed amounts

relative to China’s total annual exports of

USD 2,500 billion. For example, in the bullish

scenario, if 15% tariffs on USD 110 billion is

removed, then the RMB may appreciate by

0.7% (0.15*110/2500).

The more likely scenarios show that the

RMB could be confined to a 2% range

immediately after phase one trade

negotiations conclude. However, an estimate

of the most extreme scenarios shows that

the RMB could move within a 9% range. Our

most bullish scenario is unlikely in the short-

term given that the Trump Administration

would have to rely on the rollback of

significant tariffs as a deal enforcement

mechanism. However, it is still useful to

gauge how much the RMB may appreciate

by when trade relations normalize. On the

other hand, the most bearish scenario of

imposing 45% tariffs on all of China’s annual

exports to the US could be what President

Trump meant by “substantially raise those

tariffs” on November 12th at the Economic

Club of New York, given that he made such a

proposal during an interview with “The New

York Times” in January 2016. However, it is

November 2019 and the US presidential

election is less than a year away, so such a

most bearish scenario may be even less

likely than our most bullish scenario.

Chart Book


Market Indicators

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

Chart Book


CNH HIBOR Fixing (%) Hong Kong Offshore RMB Bond Issuance (RMB bn)

CNH & CNY China Sovereign Curve(%, 29 Nov 2019) FTSE-BOCHK Offshore RMB Bond Composite Index

Source: Bloomberg

Source: Bloomberg Source: Bloomberg

Source: BOCHK Global Market estimate

133.8

100

105

110

115

120

125

130

135

140

13/0

113

/07

14/0

114

/07

15/0

115

/07

16/0

116

/07

17/0

117

/07

18/0

118

/07

19/0

119

/07

End of Nov:

(5.0000)

0.0000

5.0000

10.0000

15.0000

20.0000

01/16 07/16 01/17 07/17 01/18 07/18 01/19 07/19

overnight 1-week 3-month

overnight 2.6962%1-week 2.9768%

3-month 3.4220%

End of Nov:

Chart Book


RMB Clearing Transaction Value (RMB tn)

SWIFT World payments currency ranking & market share

Source: HKICL

Source: SWIFT

October 2016 October 201940.55%USD#1

EUR 32.26%#2

GBP 7.61%#3

JPY 3.38%#4

1.73%CAD

EUR 33.56%#2

GBP 7.00%#3

JPY 3.64%#4

#51.82%#5 CAD

CNY#6 1.67%

USD#1 40.64%

1.65%#6AUD

CNY#7 1.63%

HKD#8 1.33%

Disclaimer: This report is for reference and information purposes only. It does notreflect the views of Bank of China (Hong Kong) or constitute any investment advice.

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Documents

Offshore RMB Express - Bank of China...Market Review Offshore RMB Express 1 I. China-US trade talk stalled in the first stage, CNH hovering between 7 and 7.03 On November 8, the market