Offshore RMB Express - Bank of China...Offshore RMB Express 1 1. Offshore RMB exchange rate strengthened In August, supported by a number of favorable factors at home and abroad, the

Offshore RMB

Express Issue 43‧

September 2017

Contents

Part 3

Part 4

Part 1

Special Topics

Chart Book

Market Review

Part 2 Policy and Peers Updates 4

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. Offshore RMB exchange rate

strengthened

In August, supported by a number of

favorable factors at home and abroad, the

exchange rate of RMB against the US dollar

headed higher. On August 31, the central

parity rate of RMB against the US dollar rose

to 6.60, a 14-month high, up by 1.9% MoM

and 4.8% YTD. On August 31, CNH

appreciated against USD by 1.9% MoM and

closed at 6.596, the highest level since June

last year. Meanwhile, CNY appreciated

against USD by 1.9% MoM and closed at

6.5963. The average spread of the month

between CNH and CNY almost disappeared.

For the HIBOR fixing, CNH HIBOR fixing

rates were relatively stable in August. On

August 31, the O/N, 1-week and 3-month

CNH HIBOR rates were 1.86%, 2.57% and

3.97%, respectively. The market

expectations of the RMB exchange rate have

been reversed, and it will remain strong in

the short term.

2. Major RMB business indicators

improved

RMB deposits in Hong Kong increased

for a second month by 1.6% MoM to RMB

534.7 billion in July 2017. The amount of

RMB cross-border trade settlement

decreased by 11.5% MoM to RMB 329.6

billion in July, down by 19.1% YoY. In

Taiwan’s offshore market, as of the end of

July 2017, total RMB deposits rebounded for

3 consecutive months, up by 0.1% or RMB

0.2 billion from the previous month to RMB

309.4 billion.

.

Offshore RMB businesses stabilized in August. The exchange rate of onshore and offshore

RMB against US dollar (CNY and CNH) both headed higher to over 6.60. The improvement in

major RMB business indicators reflects increasing international use of the RMB and the

recovery in market confidence.

.

Offshore RMB Market Continues

to Improve

Market Review

Offshore RMB Express ２

3. The international use of RMB

increased

SWIFT data show that in July 2017, the

RMB regained its position as the fifth most

active currency for global payments with a

share of 2.00%, an increase from 1.98% in

June 2017. Overall RMB payments value

decreased by 3.71% compared to June 2017,

whilst in general all payments currencies

decreased by 4.34%. RMB RTGS turnover

was RMB 20.19 trillion in August 2017 for a

MoM decrease of 0.6%. In the first eight

months of this year, RTGS turnover

increased by 6.2% YoY to RMB 142.34

trillion.

4. RMB bond held by foreign

institutions continued to rise

According to the latest date released by

the China Central Depository & Clearing Co.

Ltd and Shanghai Clearing House, as of the

end of July, the custody amount of foreign

institutions in China's interbank bond market

was RMB 841.5 billion, which increased by

RMB 39.9 billion in one month to the highest

level since June 2016. In July, foreign

institutions increased their holdings of

treasury bonds by RMB 37.8 billion, rising for

five consecutive months. Thanks to favorable

factors including the slowdown in capital

outflow, solid economic growth, improving

outlook for RMB internationalization, etc, the

size of China treasury bonds held by foreign

institutions continued to increase. The Bond

Connect ran smoothly in the first month of

operation. Market participants were

optimistic about the investment value of the

Bond Connect in the long run. Moreover,

they look forward to the improvement in

taxation regime, rating and trading varieties

in the future. As the RMB exchange rate

stabilized, total return of the Chinese bond

market is higher than that of most developed

countries. Given the convenience of Bond

Connect, it will attract more and more

overseas funds to China’s bond market.

Market Review

Offshore RMB Express ３

5. The domestic capital market is

opening up

According to statistics from the State

Administration of Foreign Exchange (SAFE),

the approved quota for RQFII totaled RMB

584.9 billion as of August 30, up by RMB

36.6 billion compared with a month ago, with

a total of 188 qualified foreign institutional

investors having been approved. At the same

time, the approved quota for QFII totaled

RMB 94 billion as of August 30, up by RMB

0.7 billion compared with a month ago, with a

total of 286 qualified foreign institutional

investors having been approved. In addition,

the approved quota for QDII totaled RMB 90

billion as of August 30, with a total of 132

qualified foreign institutional investors having

been approved. No new quotas were

approved in the past 21 months.

Policy and Peers Updates


“SAFE required advancement of reporting on

overseas spending

The State Administration of Foreign Exchange (SAFE) announced in June that

effective from September 1, domestic financial institutions would be required to report on

a daily basis all cash withdrawals via overseas ATMs and spending of more than RMB

1,000. However, the implementation was brought forward on August 21. According to the

SAFE, the measure aims at enhancing management in order to combat illegal

transactions overseas. It neither affects personal usage of debt card, nor relevant to the

foreign exchange market trend at present.

Some comments argue that the new rule aims at monitoring spending pattern,

preventing assets transfer overseas. Nevertheless, some of the associated third party

payments, such as Alipay and WeChat Pay, are excluded from data collection sample,

making it as the loophole of this new rule.

PBOC constrained newly issued interbank NCD with tenor of less than 1

year

On August 31, the People’s Bank of China (PBOC) announced to revamp the

existing rule on managing interbank negotiable certificate of deposit (NCD). Before the

new arrangement, the tenors of interbank NCD included within 1 year, 1 year, 2 years

and 3 years. Under the new rule, financial institutions are prohibited to issue interbank

NCD with maturity exceeding 1 year starting from September 1. However, the issued

NCD with tenor of more than 1 year can be rolled over until maturity.

RMB and MNT interbank regional trading was officially launched

The China Foreign Exchange Trading Center officially kicked off RMB and MNT

interbank regional trading on August 11. On the first trading day, transaction amount

reached MNT 620 million (equivalent to RMB 1.68 million). Bank of China, Industrial and

Commercial Bank of China, Agricultural Bank of China, China Construction Bank, Bao

Shang Bank and Bank of Inner Mongolia were first batch of participating banks and price

quoting banks for the transactions.

Special Topics

Offshore RMB Express

In order to cope with the depreciation cycle of the RMB and prevent systematic risks

that may be triggered by the outflow of funds, exchange rate stability measures have

become the focus of recent policies, which is reflected in the management of foreign

currency demand in the onshore market, and also stricter controls on RMB cross-border

capital flows, constraining the liquidity pool, increasing funding costs, and reducing

offshore RMB bond issuance. Meanwhile, the RMB’s inclusion in the SDR basket

presents a precious opportunity for RMB internationalization.

Michael DAI, Senior Economist

Offshore Market’s Functions in RMB

Internationalization

5

In order to balance between exchange

rate stability and RMB internationalization,

China has stepped up efforts to accelerate

the opening-up of its markets. After the

launch of Shanghai-Hong Kong Stock

Connect, China has introduced Shenzhen-

Hong Kong Stock Connect and Bond

Connect, opened up Chinese bond and

foreign exchange markets to foreign

institutional investors including central banks

and sovereign wealth funds, and expanded

the RQFII quota. These measures attract

foreign securities investment funds to offset

the pressure of capital outflows so as to

achieve the goal of stabilizing the exchange

rate. On the other hand, opening up the

onshore capital markets can contribute to

RMB internationalization. However, the

question is whether RMB internationalization

needs the support of the offshore market?

This can be explored from the main

indicators of RMB internationalization and

the experience of other major international

currencies.

1. RMB reserve asset investment

The RMB officially joined the SDR in

October 2016. The IMF has separately

identified holdings in the RMB in the COFER

statistics since the end of 2016. The ECB

also announced that it had invested its

foreign exchange reserves in RMB assets.

The RMB’s proportion in the currency

composition of official foreign exchange

reserves is an important indicator of RMB

Special Topics


internationalization. According to COFER,

foreign exchange reserves in the RMB

reached USD 88.54 billion as of the first

quarter of this year, accounting for 1.0% of

the USD 8848.95 billion in allocated reserves,

or less than 1.0% of the total of USD 10.9

trillion in all official foreign exchange

reserves. The RMB is the only emerging

market currency that has become an

international reserve currency. Foreign

central banks have diversified their foreign

exchange reserves into the RMB. Most of the

RMB assets are likely held in the most

secure RMB treasury bonds and policy bank

bonds. Both are mainly traded in the onshore

market, with the latest outstanding balances

at RMB 25.3 trillion and RMB 12.7 trillion,

respectively.

Hong Kong is the world's largest RMB

offshore market, and the Ministry of Finance

of PRC has been issuing bonds in Hong

Kong consistently. However, Hong Kong’s

market size is far smaller than that of the

Mainland, the world’s third largest bond

market. The latest outstanding balance of all

RMB bonds is only approximately RMB 200

billion in Hong Kong. Therefore, the onshore

market is the best choice for foreign

exchange reserve investment. The offshore

market can only play a limited supporting role

so far. To reflect the size of China’s economy

and bond market, 4.6% of global official

foreign exchange reserves need to be in

RMB assets, and the amount should be more

than USD 403 billion.

2. RMB foreign exchange

transactions

In this area, the offshore market will play

a leading role in the foreseeable future.

According to the BIS’s triennial global foreign

exchange transaction market survey, as of

April 2016, despite the depreciation of the

RMB for three consecutive years, on a net-

net basis, the RMB’s daily foreign exchange

transaction volume grew by 69.0% from 2013

to USD 202.1 billion. The RMB also rose to

become the world’s eighth most actively

traded currency. However, onshore RMB

foreign exchange transactions only accounts

for 21.7% of the total on a net-gross basis,

slightly down by 1.0% from 2013. In other

words, more than three quarters of RMB

foreign exchange transactions took place in

the offshore market. By transaction volume,

the world’s top five major RMB foreign

exchange markets are Hong Kong, Mainland

China, Singapore, the United Kingdom and

the United States.

Special Topics


This pattern is partly due to China’s

exchange rate stability measures and strong

real demand for foreign currencies, while

offshore market transactions accommodate

real demand, investment and speculation

purposes. Other major international

currencies share the same pattern. The

United Kingdom is the largest foreign

exchange market of major reserve

currencies such as the dollar, the euro, and

the yen, and its trading volume can even be

multiple times of the onshore market. The

foreign exchange transaction volume in the

offshore market accounts for about 80% of

the three major international reserve

currencies. Therefore, the offshore market is

very important in foreign exchange

transaction. If the RMB is to become the

world’s third largest foreign exchange

currency, its share in foreign exchange

transactions must rise from 4.0/200 to

21.6/200, with more than USD 1.1 trillion in

average daily trading volume.

3. RMB cross-border payment

Regarding RMB cross-border payment,

the larger the payment size of the currency,

the higher its international status. Cross-

border payment could involve one onshore

and one offshore party or two offshore

parties. According to SWIFT, RMB was the

world’s sixth largest international payment

currency, accounting for 1.98% as of June,

still lower than the same period in 2015 when

it was ranked fifth with a share of 2.09%.

While using phrases such as "lost

momentum" and "slowdown", the report also

lists five elements as the long-term driver of

RMB internationalization, namely, the Belt

and Road Initiative, CIPS, Hong Kong

“Super-connector” (Hong Kong accounts for

more than 75% of the RMB international

payments market), the mainland capital

market’s opening-up and FinTech. In this

area, the offshore market is essential. If the

RMB is to become the world’s third largest

payment currency, its share of cross-border

payment must increase from the current

1.98% to more than 8.0%.

4. RMB international bonds

According to BIS’s narrow definition,

RMB international bonds refer to RMB bonds

issued by foreign institutions in onshore or

offshore markets. This area is still a weak

point for the RMB because according to BIS

statistics, the outstanding balance of RMB

international bonds at the end of 2016 was

USD 110.6 billion, accounting for only 0.8%

of the global international bond market (US

dollar and euro international bonds

accounted for 63.0% and 22.0%, respectively,

and 85% combined).

Special Topics


In the onshore market, the issuance of panda

bonds surged to a new high of RMB 129 billion

last year, but in the offshore market, the

issuance of dim sum bonds and lion city bonds

declined. In comparison, the US dollar and euro

international bond markets are equivalent to

20.0%-25.0% of the overall US dollar and euro

bond markets.

For the yen, the international bond market is

only equivalent to 2.6% of the global

international bond market and 3.0% of the

overall yen bond market, compromising the

yen’s international currency status. Therefore, in

this area, RMB internationalization can be much

more effective with the support of the offshore

market. If RMB international bond market is to

become the world’s third largest, RMB

international bonds should amount to no less

than USD 350 billion, with a share of more than

2.6%.

5. RMB international deposits and loans

At present, in Hong Kong, the world's

largest offshore RMB center, RMB deposit and

loan balances were RMB 546.7 billion and RMB

294.8 billion respectively (as of the end of 2016).

It is small when compared to the onshore

market, where RMB deposit and loan sizes were

RMB 151.1 trillion and RMB 106.3 trillion,

respectively, or USD 6957 billion in international

deposits and USD 6798 billion in international

loans according to BIS for the same period.

Similar to the international bond market, the

international deposit and loan markets are

dominated by the US dollar and the euro (with a

combined 80.0% of deposits and 80.4% of

loans), while the yen, as the third largest

currency, only accounted for 3.4% and 3.6% in

the international deposit and loan markets

respectively. Therefore, if the RMB is to become

the world’s third largest currency in international

deposits and loans, RMB deposits and loans will

only need to increase to USD 234 billion and

USD 246 billion, respectively. The offshore

deposit market had such potential before the

recent correction. Although the onshore market

is the largest in the world, this area largely

hinges on the developments of the offshore

market.

In conclusion, the developments of offshore

markets play a very critical role in many aspects

and are indispensable to further RMB

internationalization. It should be noted that the

developments of offshore markets are a new

variable and could have ramifications on

monetary policy, exchange rates, interest rates,

and even financial risks in the onshore market,

when cross-border capital flows are not yet free.

Once the Chinese economy, financial system

and regulation are able to cope with these

effects, the RMB internationalization will become

successful.

Special Topics


1. Qualified Chinese enterprises have

been encouraged by policies to issue

bonds overseas

The Mainland’s foreign exchange reserves

had shrunk at fast pace, as RMB

depreciation expectation accelerated

following the 8.11 exchange rate reform in

2015. As a result, the Mainland strengthened

capital controls since the second half of 2016

and attracted foreign capital through a

“controlling outflow amid expanding inflow”

approach. In September 2015, the Mainland

streamlined the procedure for issuing bonds

overseas. Subsequently, the People’s Bank

of China (PBOC) unified the management of

local currency debts and foreign currency

debts for domestic enterprises in May 2016.

In June 2016, the State Administration of

Foreign Exchange also relaxed foreign

exchange settlement for foreign debts on a

How Long Will Chinese Enterprises

Remain Enthusiastic about Issuing

Bonds Overseas?

Kam LIU, Analyst

Overseas bond issuance by Chinese enterprises picked up in the first half of this year.

The number of issuance reached 1,099, which surged by almost 10 times from the same

period in 2016. Meanwhile, the funds raised increased by almost 3 times to USD 148.3

billion. In general, substantial increase of overseas financing by Chinese enterprises was

mainly attributable to tightening credit conditions in the domestic market, relatively low

financing cost overseas and declining exchange rate risk. Nevertheless, overseas bond

issuance by Chinese enterprises will likely cool down in the second half of the year, due to

the easing of new regulatory measures, the resumption of financing function of the bond

market in the Mainland, as well as the dollar rebound from an oversold position. For the

entire year, Chinese enterprises will be more enthusiastic about issuing bonds overseas,

and the issuance will set a new record.

Special Topics


voluntary basis. The Mainland relaxed cross-

border funding policies in the recent years,

facilitating qualified Chinese enterprises to

issue bonds overseas and the usage of funds.

In the first half of 2017, the Mainland banks

aggregately issued USD 76.8 billion worth of

bonds, up 569% from a year ago.

2. Tightening credit conditions

affected the direct financing function

of the bond market in the Mainland

In the first half of this year, the Mainland

promoted financial deleveraging by a

combination of “tight monetary conditions”

and “robust supervision”. Therefore,

financing cost climbed considerably,

constraining the financing function of the

bond market. In the first half of this year, net

credit financing registered a decline of RMB

387.361 billion, or down 120% YoY, which

was the first decline in recent years. Since

September 2016, regulatory authorities in the

Mainland have released policy documents on

controlling domestic financing for property

developers. In order to mitigate funding

pressure, property developers raised funds

overseas instead. In the first half of 2017,

dollar bond issuance by property developers

amounted to USD 24.4 billion, which was

75% higher than the issuance amount in

2016.

Special Topics


3. Overseas financing cost has a

competitive edge due to wide interest

rate spread between China and the

US

While the Federal Reserve raised

interest rate in March and June, the US

economy underperforms market expectation.

The US economy grew 2.1% in the first half

of this year, compared with a growth rate of

3% that President Trump promised. The 10-

year treasury yield dropped to around 2.2%

as the effect of “Trump Trade” subsided. In

contrast, China’s economic growth rates for

Q1 and Q2 of this year were better than

expected. When the Federal Reserve raised

interest rates this year, the PBOC moved in

tandem. “In reality, the rise of domestic

market interest rates in the recent half year

preceded the Federal Reserve’s rate hikes”,

said a PBOC official. In the first half of this

year, bonds issued by many Chinese

enterprises overseas were priced between

3% and 4 %; whereas the yield of a domestic

AAA corporate bond was 6.14% in May.

In light of the wide interest rate spread

between China and the US, Chinese

enterprises could benefit from relatively low

financing costs when they issued bonds

overseas.

4. Declining exchange rate risk for

Chinese enterprises issuing bonds

overseas as the dollar weakened

The dollar has depreciated 11% year to

date, given the factors of subdued inflation,

policy implementation setbacks for the

Trump administration, robust recovery of the

Eurozone economy, etc. The market

believed that the European Central Bank

(ECB) will gradually exit from quantitative

easing, as the ECB President Draghi said

that “the Governing Council will likely discuss

changing the monetary stance in autumn”.

Against this backdrop, the euro will likely

remain strong while the dollar will stay weak.

At present, the rebound of the RMB is driven

by the weak dollar. At the same time, capital

control is still relatively tight in the Mainland.

The inclusion of counter-cyclical factor in the

RMB central parity fixing also helps revert

the trading pattern during pro-cyclical periods.

Therefore, substantial depreciation of the

RMB will be unlikely this year. For Chinese

enterprises issuing bonds overseas,

exchange rate risk has declined.

Special Topics


5. Overseas financing by Chinese

enterprises may decrease in the

second half of the year

Due to the abovementioned factors,

overseas bond issuance by Chinese

enterprises picked up in the first half of the

year. However, overseas financing by

Chinese enterprises will likely decline in the

second half of the year, following the

changes in monetary stances and liquidity

conditions in the Mainland.

Firstly, the pace of new regulatory

measures in the Mainland may slow down

with co-ordination among regulatory

authorities. Although robust supervision will

still be in place this year, the pace of

launching new measures may slow. First of

all, M2 has registered single-digit growth for

3 months in a row, reflecting progress in

financial deleveraging in the Mainland.

Meanwhile, financial services’ role in

supporting the economy has been

emphasized in the fifth National Financial

Work Conference, which implied that

financial deleveraging would progressively

carry out amid stability. Last but not least,

under the co-ordination by the cabinet

Committee on Financial Stability and

Development, a newly announced committee

under the State Council, different regulatory

measures will be launched progressively. As

a result, the impacts on the bond market

should be marginal.

Secondly, the PBOC clearly intends

to stabilize liquidity conditions in the

Mainland. Regarding open market

operations in July (based on full-scale

statistics and including Medium-term Lending

Facility), the PBOC injected liquidity for 3

successive weeks with weekly amount of

RMB 510 billion, RMB 110.5 billion and RMB

141.5 billion, respectively. Such pattern

largely reflects the mindset of “adjusting

open market operations based on liquidity

conditions” mentioned by the PBOC. The

PBOC still strongly emphasizes stabilizing

liquidity conditions, and hence the monetary

stance will remain prudent in the second half

of the year.

Thirdly, direct financing function of

the bond market may gradually resume. In

the first half of this year, off-balance sheet

business shrank considerably as financial

deleveraging was taking place. Instead,

social financing mainly switched to bank

credit financing. Many banks had already

utilized 70% of their annual credit quota in

the first six months. As such, social financing

may increasingly rely on debt financing in the

second half of the year, and the direct

financing function of the bond market may

gradually resume.

Special Topics


Fourthly, the end of the strong dollar

cycle has yet to come. The dollar

depreciated for 5 straight months as of

August 1, the longest period of depreciation

since 2011. With multiple factors such as

declining impact of the Federal Reserve’s

tapering, Trump’s policy setbacks, stronger

recovery of the Eurozone’s economy and

narrowing divergence of global monetary

policy stances, the dollar has depreciated

sharply for a long period of time. However, it

is premature to argue that strong Dollar cycle

has come to the end at this moment.

For one, the end of strong dollar cycles

in the past was mainly driven by economic

recessions in the US. However, the US

economy is gradually recovering for the time

being, which is completely different from the

weak dollar cycles in the past.

For another, the Federal Reserve is

carrying out normalization of monetary policy,

with a series of rate hikes and prospective

balance sheet reduction. The deprecation of

the dollar at present may be an overreaction

to the reverse of “Trump Trade” and marginal

monetary policy tightening by the ECB. For

the time being, inflation in the Eurozone is

still far from the central bank’s target.

Moreover, unemployment rate is relatively

high and economic performance among

member states differ. Therefore, the ECB’s

exit from quantitative easing or the potential

pace of it remains uncertain. To conclude,

while the dollar may remain relatively weak

in the second half of the year, room for

further deprecation is limited.

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

July: 534.7bn

0

100

200

300

400

500

600

700

800

01/11 01/12 01/13 01/14 01/15 01/16 01/17

July: 329.6bn

6.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

6.9

7

07/15 09/15 11/15 01/16 03/16 05/16 07/16 09/16 11/16 01/17 03/17 05/17 07/17

USD-CNH USD-CNY

End of Aug: USD-CNH 6.596

USD-CNY 6.5963

Chart Book


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

CNH & CNY China Sovereign Curve (%, 31 Aug 2017)

FTSE-BOCHK Offshore RMB Bond Composite Index

Source: Bloomberg

Source: Bloomberg Source: Bloomberg

Source: BOCHK Global Market estimate

End of Aug: 124.09

End of Aug: Overnight 1.8573% 1-week 2.5673% 3-month 3.9677%

Chart Book


RMB Clearing Transaction Value (RMB tn)

SWIFT World payments currency ranking & market share

Source: HKICL

Source: SWIFT

December 2015 July 2017

43.89% USD #1

EUR 29.39% #2

GBP 8.43% #3

JPY 2.78% #4

2.00% CNY

EUR 33.34% #2

GBP 7.31% #3

JPY 3.15% #4

#5 2.31% #5 CNY

CAD #6 1.70%

USD #1 39.83%

1.82% #6

AUD #7 1.62%

CHF #8 1.57%

CAD

August: 20.19tn

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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Documents

Offshore RMB Express - Bank of China...Offshore RMB Express 1 1. Offshore RMB exchange rate strengthened In August, supported by a number of favorable factors at home and abroad, the