9. Ricky Li_Offshore RMB Market Evolution

Offshore RMB Market Evolution

Ricky LiStrategic Planner

Economic and Strategic Planning Department Bank of China (Hong Kong) Limited

June 2014

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A. RMB the Next International Currency?

B. Policy and Market Development

C. Hong Kong’s Roles in Offshore RMB Market


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Second-largest economy in the world

Largest exporter and second-largest importer in the world

Inbound foreign direct investment (FDI) ranks first in the world

RMB internationalization gathers pace

China continues to accelerate regulatory reforms towards RMB internationalization

Payment – the 7th most used payment currency

Trade finance – the 2nd most used trade finance currency

FX trading – the 8th largest FX trading currency (SWIFT RMB Tracker October 2013)

Source: SWIFT

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RMB’s growing international reputation

Bilateral currency swap agreements: 23 countries and regions, RMB 2,568 billionSeveral central banks/monetary authorities have already borrowed RMB funds from the currency swaps

Growing bilateral currency swap lines are to promote the use of RMB in global trade and finance, also a step towards RMB’s achievement as a reserve currency

UAE, 35bn

Iceland, 3.5bn

Thailand, 70bn

Indonesia, 100bnSingapore,

300bn

Kazakhstan, 7bn

Uzbekistan, 0.7bnTurkey, 10bn

Australia, 200bn

Argentina, 70bn

Brazil, 190bn

UK, 200bnUkraine, 15bn

New Zealand, 25bn

Hungary, 10bnAlbania, 2bn

South Korea, 360bn

Pakistan, 10bn

Belarus, 20bn

Hong Kong, 400bn

Malaysia, 180bn

Mongolia, 10bn

ECB, 350bn

Source: PBoC, BOCHK

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Region1Q2014

Rank %Hong Kong 1 74.6%

Singapore 2 6.9%

UK 3 6.2%

Taiwan 4 2.3%

US 5 1.9%

France 6 1.7%

Australia 7 1.3%

Luxembourg 8 0.8%

Germany 9 0.7%

Netherlands 10 0.6%

Japan 14 0.4%

Strengthening RMB usage among major economiesDeveloped countries are increasingly involved in RMB businesses. New offshore RMBcenters are emerging, and each has its own niche and strength.

Top 10 Regions – RMB Payment

Signed MOU with PBOC on RMB Clearing in London

Signed MOU with PBOC on RMB Clearing in Frankfurt

Source: SWIFT

…

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Economics relationship between Japan and China

China is the largest trading partner of Japan while Japan is the second largest trading partner of China.

This lays a solid foundation for further development of the RMB business in Japan.

The trade dependency between Japan and China has increased remarkably in the past decade

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Trade deficit Export to Japan Import from Japan

The use of JPY/RMB in the bilateral trade between Japan and China:

help lower currency conversion costs for economic entities;

reduce settlement risks for cross-border trade;

promote financial cooperation and enhance financial ties between the two countries.

Bilateral trade between China and Japan

Source: CEIC

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China is the largest Asian recipient of Japanese FDI. A lot of Japanese companies have revenue and expenses in RMB. The use of RMB in their FDI projects in China will create a natural hedge to avoid investment currency mismatching.

The issuance of RMB dim-sum bonds in Hong Kong or Tokyo market can facilitate to raise RMB funding for these FDI projects.

Tokyo, one of the largest financial markets with an excellent infrastructure and expanding customer base for bond issuance, could become an offshore market for the RMB funding aiming at Japanese enterprises, and these funding activities will further enhance the status of Tokyo as an international financial center.

Full business potential to be explored in offshore RMB financing projects

Tokyo has great potential to be one of the major offshore RMB markets

Cooperation among global financial centers

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Source: CEIC

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Major milestones of the offshore RMB market

2007200720042004 20092009 20102010 2013 onwards2013 onwards

Phase 1: Retail RMB banking serviceFeb 2004 – Introduction of RMB business, including deposit-taking, remittance, currency conversion and bank card business

Phase 1: Retail RMB banking serviceFeb 2004 – Introduction of RMB business, including deposit-taking, remittance, currency conversion and bank card business

Phase 2: Offshore RMB bonds market2007 – Issuance of RMB bonds in HK by Mainland financial institutions

Phase 2: Offshore RMB bonds market2007 – Issuance of RMB bonds in HK by Mainland financial institutions

Phase 3: Cross-border RMB trade settlement2009 – Implementation of Pilot scheme of cross-border RMB Trade Settlement

Phase 3: Cross-border RMB trade settlement2009 – Implementation of Pilot scheme of cross-border RMB Trade Settlement

Phase 4: Increasing depth and breadth Hong Kong’s offshore RMB market taking shape

Phase 4: Increasing depth and breadth Hong Kong’s offshore RMB market taking shape

Offshore RMB business scope has been expanding in an orderly manner

Bank of China (Hong Kong) was appointed asthe RMB Clearing Bank in Hong Kong at theend of 2003, which marked the start of the HongKong offshore RMB market

From July 2010, the revised SettlementAgreement on the Clearing of RMB Businessesenabled a broader range of RMB businesses inHong Kong. Afterwards more policies wereintroduced to liberalize RMB and facilitate theusage globally

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RMB Cross-border trade settlement

Trade has been fully open since Jun 2012

18.5% or RMB 1.65 trillion of cross-border merchandise trade settled in RMB (2014Q1)

1. RMB FDI and ODIForeign Direct Investment settled in RMB 165 billion (2014Q1)

Overseas Direct Investment Settled in RMB 28 billion (2014Q1)

Mainland China

Trade

Capital

RMB

Major policies development

3. RMB Qualified Foreign Institutional Investor RMB 480 billion of investment quota ( Mar 2014)

China encourages the use of RMB in cross-border trade and investment

Source: PBOC, HKMA, BOCHK Research

2. RMB Bond MarketsOnshore: Central banks, RMB CBs and PBs can invest in Mainland’s inter-bank bond marketOffshore: RMB 350 billion outstanding (Mar 2014)

4. Shanghai Free Trade Zone

5. Shanghai-Hong Kong Stock Connect Scheme

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PoliciesItems Fully open Partially open Not yet open

Goods

Import √

Export √

Service

Finance √

Insurance √

Others √

OthersLabour √

Investment income √

Current account has been fully liberalized

All companies in mainland China with import and export qualifications are now

permitted to make and receive payments in RMB for goods, services and other

current account transactions with their counterparts all over the world since 2012.

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Policies

Items Fully open Partially open Not yet open

Capital InflowForeign Direct Investment(FDI)Inter-bank Bond Market

RMB Qualified Foreign Institutional Investor (RQFII)

Capital outflowOverseas Direct Investment(ODI)Offshore Bond MarketOffshore Securities Market

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Capital account liberalization is in progress

Overseas Direct Investment (ODI) and Foreign Direct Investment (FDI) can be settled in RMB

Foreign financial institutions including foreign central banks, clearing banks & participating banks can invest their RMB funds into China’s domestic interbank bond market

Eligible fund companies, securities firms and banks can invest into inter-bank bond market and securities market using their RMB through RQFII scheme

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RMB Qualified Foreign Institutional Investors (RQFII)

RMB Qualified Foreign Institutional Investors (RQFII) scheme was formally launched at the end of 2011 in Hong Kong

In 2013, the scheme was further expanded to Singapore and UK. France has also become one of the pilot regions in 2014

As of end-April 2014, the total amount quota granted was 215.6 billion RMB

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270 270 270

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50 50

80

2011 2012 2013 2014

Hong Kong UK Singapore France

A widening channel for offshore RMB funds to access to China’s domestic bond and stock markets

RQFII Quota Distribution (RMB billion)

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Shanghai Free Trade Zone

“Gradual relaxation on the first line with efficient control mechanisms at the back”

Promote financial reform on a trial basis, and from four aspects:

1. cross-border use of RMB, 2. capital account convertibility,3. interest rate liberalization, 4. foreign exchange management

Innovative account management framework:

FTA for residents in FTZ ; FTN for non-residents; corporations in FTZ can set up special RMB deposit accounts for handing intra-group two-way cross-border RMB cash pooling or centralized receive and payment business under current account

Allowing non-bank FIs and corporates in FTZ to borrow RMB fund from the offshore market, subject to “Macro prudential policy parameter” or quota management framework

Opportunities:

RMB Financing demand from FTZ enterprises and banks RMB FX service for FTZ banks Wealth management services for FTZ residents Promote further development of RMB derivatives market

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Shanghai-Hong Kong Stock Connect Scheme

China opens door wider to its stock market

• A mutual market access program, through which investors in Hong Kong and Mainland China can trade and settle shares listed on the other market respectively via the exchange and clearing house in their local market under a quota scheme

• A significant development for RMB capital account liberalization

• Central government continues to position Hong Kong as the best testing zone for promoting RMB internationalization

• Reinforce Hong Kong’s role as the premier offshore RMB center

Enhanced cooperation with Shanghai Expanded investment channels available for offshore

RMB funds Increased transaction volume in RMB related

businesses, e.g. currency exchange Source: HKEx, BOCHK

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Outlook of RMB Internationalisation

Global use of RMB gathers pace

Apart from the strong position in Asia-pacific countries, western developed countries have also gained momentum to participate in RMB community

Capital account liberalization will be the next policy focus

Foreign investors are gaining more access to China’s capital market

On track to be a global reserve currency:

RMB is now in transition from a trading currencyto an investment currency; the international reserve currency status will establish eventually

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Hong Kong – Supervisory principles of RMB business

RMB funds in and out of the Mainland:

Should comply with the rules and regulations of the Mainland;

Authorities in the Mainland andlocal banks are responsible for the verification of the transactions.

RMB funds outside the Mainland:

Comply with prevailing market practices for other foreign currencies, unless otherwise specified.

Two major principles governing Hong Kong’s RMB Business

Corporate and institutional customers in Japan can open RMB accounts for any purpose No restrictions on the usage of RMB funds in Japan or offshore market - not limit to trade

settlement purposes nor transaction with counterparties in Mainland China

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As a trade & logistic hubto conduct RMB cross-border trade settlement

As a financing center to facilitate RMB funding and

investment

As a RMB wealth management center

for individuals

Hong Kong – Premier offshore RMB centre

The offshore RMB market has been established in Hong Kong with a global impact.

As a RMB clearing platform to facilitate

worldwide RMB payments

“Hong Kong has a first mover advantage, which has resulted in the majority of the liquidity, a developed RMB RTGS infrastructure and a talent base for continued innovation in RMB product offering”

(RMB Internationalization Whitepaper, SWIFT 2012)

As a CNH trading center to provide various

products

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Hong Kong – Trade & logistic hub to conduct RMB cross-border trade

RMB Cross-border trade settlement conducted through Hong Kong (RMB billion)

Source: HKMA

The volume of cross-border RMB trade settlement conducted through Hong Kong

increased 79% from RMB 0.83 trillion in 2013Q1 to RMB 1.49 trillion in 2014Q1

Majority of China’s cross-border RMB trade settlement was settled via Hong Kong

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CNY vs. CNH?

Requirements for exchange conducted through “Trade Conversion Service”(CNY):

Trade in physical goods

Counterparty of trade transaction must be a Mainland enterprise

The conversion date and amount should be coincide with the proceeds/payment of trade settlement

CNH RMB FX pricing in the offshore market

with overseas banks, which depend on their own RMB open positions

Exchange rate is floating freely and impacted by market supply and demand of RMB

CNY Onshore FX quotation with the China

Foreign Exchange Trade System

Exchange rate fluctuates around the central parity rate with daily limits (2% currently), and is relevant to China’s national currency policy

CNH, the offshore RMB, is a free-convertible currency

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Hong Kong – Financing center to facilitate RMB funding and investment

Mar 2014944.9bn

About 70% of RMB customer deposits were held by corporates

RMB is the 2nd largest foreign currency deposits in Hong Kong, accounting for 12% of the total deposits

Sources of financing: dim sum bond issuance, CNH market & etc.

Surplus RMB liquidity in Hong Kong can be channeled to meet the demand elsewhere

The offshore RMB capital pool has been established in Hong Kong which supports the financing activities for global institutes and corporate customers

Source: HKMA

Hong Kong RMB Deposits(RMB billion)

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Offshore RMB Dim-Sum bond market

In 2010, BOCHK arranged the first corporate bond deal for Hopewell infrastructure, which marked the take-off of offshore RMB bond. Corporate issuances have since then grown exponentially with many of the firsts come to the market.

From 2007 to 2014, the total issue size of dim sum bonds has exceeded RMB470 billion

In 2014Q1, the total issue size is RMB58.6 billion

In 2010, BOCHK arranged the first corporate bond deal for Hopewell infrastructure, which marked the take-off of offshore RMB bond. Corporate issuances have since then grown exponentially with many of the firsts come to the market.

From 2007 to 2014, the total issue size of dim sum bonds has exceeded RMB470 billion

In 2014Q1, the total issue size is RMB58.6 billion

Offshore RMB Bond Primary Issuances(RMB billion)

Source: HKMA, as of end-Mar 2014

10 12 16

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108 112 117

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2,007 2008 2009 2010 2011 2012 2013 2014Q1

The depth and width of the offshore RMB bond market continue to develop substantially

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Hong Kong – Offshore RMB wealth management center for individuals

RMB products available in major asset classes

Cash and CDs• RMB deposits• The total outstanding amount of RMB Certificate of Deposits in Hong Kong is over 210

billion Yuan (as of Mar, 2014)

Funds • Currently most of the funds are fixed-income funds• With the introduction of RQFII, more equity funds and balanced funds are available

Bonds, Equities • Outstanding amount of Dim Sum bond is around RMB 350 billion (as of Mar, 2014)• Huixian REITS was the first RMB equity offering in HK (April 2011)

Structured prod,Commodities

• Structured products for HNW clients and institutional clients• RMB-denominated Gold ETF

Insurance • Diversified RMB insurance products, including savings, life and annuity insurance

Source: HKMA, BOCHK Research

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BOCHK(RMB Clearing Bank)

Hong Kong – Offshore clearing center to facilitate worldwide RMB payments

China

via CNAPS

via RTGS

via RTGSvia RTGS

Hong Kong

PB (D) PB (E) PB (F)

via RTGS via RTGS

Overseas Regions

PB (A) PB (B) PB (C)

via RTGS via RTGS

China National Advanced Payment System

Offshore Market Onshore Market

CNAPS =

PB = Participating Bank

Simple but efficient RMB clearing model

RTGS = Real Time Gross Settlement

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RMB Trade settlement process

• Japanese companies can make RMB payments to or receive RMB payments from their trade counterparties in Mainland China through a participating bank (BOC Tokyo).

• RMB can be purchased or RMB credit can be obtained from local banks that provide RMB services, when necessary

• The RMB proceeds can be deposited with a local bank, invested in a wide range of RMB financial products or converted into other currencies

A Tokyocompany

Participating Bank(BOC Tokyo) Bank in China

A companyin ChinaImport goods from China

RMB Exchange

Via RMB RTGS Via CNAPS

Real-time clearing

Export goods to China

Receive payments in RMB

Receive payments in RMB

RMB Remittance

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Hong Kong – Offshore clearing center to facilitate worldwide RMB payments

Global platform and comprehensive coverage for RMB clearing

Hong Kong RMB Clearing Transaction Turnover(RMB billion)

Mar 201414815 bn

In 2014Q1, the total turnover of Hong Kong RMB RTGS system reached RMB38.5 trillion, a YoY growth of 138%, close to half of 2013 full year turnover

Offshore transactions accounted for more than 90% As of end-Apr 2014, there are 221 banks participating in the RMB clearing platform in

Hong Kong (74 of which are from overseas regions). The clearing network covers more than 40 countries in six continents

Source: HKICL, BOCHK

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The established offshore RMB market

Offshore circulation of RMB funds takes initiative

Development of cross-border RMB trade

settlement and investment

Enlarged offshore RMB liquidity pool

Diversified RMB-based products and further

development of RMB asset management

Sufficient funds to support RMB financing activities,

e.g. loans, bonds

RMB Internationalization Gathers Pace

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Presentations & Public Speaking

9. Ricky Li_Offshore RMB Market Evolution