DBS RMB Index for VVinning Enterprises (DRIVE) - 4Q15

Transcription

1 DBS RMB Index for VVinning Enterprises (DRIVE) - 4Q15 DBS Group Research 15 Feb 2016 Chris Leung (852) chrisleung@dbs.com Nathan Chow (852) nathanchow@dbs.com Lily Lo (852) lilylo@dbs.com 4Q15 DRIVE fell slightly DRIVE fell further to 59.1 in 4Q15 from 59.5 in 3Q15 (Chart 1). The previous high was reached in 2Q15, when the index hit Actual and expected business needs for RMB, which include RMB customer orders/invoices/trade settlement, were stable compared to 3Q15. Companies actual and expected use of RMB payment and receivables rose marginally compared to the previous quarter, while their actual and expected use of RMB trade services surged. Access to RMB loan/credit facilities became slightly more difficult, and interest in RMB financing remains limited (Chart 2). Compared to the previous quarter, fewer respondents claimed that actual business performance has weakened, and about the same number of respondents expected a slowdown in their companies business performance in the next 12 months. Key findings and DBS insights * Unless stated otherwise, figures in parentheses represent findings in the previous survey (3Q15) 1. Fewer respondents expected RMB to depreciate in the next 12 months Much fewer respondents believed that RMB will continue to depreciate against the USD in the next 12 months (37% vs. 51% in 3Q15) (Chart 3). 35% expected the RMB to depreciate by 2-5%, and only 2% expected the RMB to depreciate by over 5%. DBS insights Because the survey period for 4Q15 was 22 Oct-25 Nov, it was not able to capture the recent surge in depreciation expectations and subsequent market turmoil. Since December 2015, the RMB depreciated 2.7% against the USD. From a technical perspective, further downside risks appear limited in the near-term given the trade-weighted index is now hovering near the floor of its perceived stable range. Having said that, the recent RMB slide could exert pressures on other regional currencies; drops in those currencies could lead to second-round effects for the RMB. We expect the RMB will drift towards 6.68 per USD by the end of 3Q RMB depreciation did not have an immediate impact on business needs for RMB and RMB product usage Business needs for RMB, measured in terms of the use of RMB customer orders/invoices/trade settlement, remained stable. 31% (33%) of respondents said they had RMB customer orders/invoices in the past 12 months (Chart 4a). RMB customer order/ invoices as a percentage of overall sales turnover was 16.1% (10.4%) on average, the highest level since 1Q15. The actual and expected use of RMB payment and receivables rose marginally (25% vs. 24% in 3Q15) whereas the actual and expected use of RMB trade services surged (7% vs. 4% in 3Q15) (Charts 5 & 6). 1

2 The percentage of companies using RMB products [1] fell slightly to 26% from 28% in 3Q15 (Chart 7). The highest recorded value was 38% in 3Q13. Specifically, companies use of various RMB products remained stable. 24% (24%) of respondents used RMB deposits; 21% (22%) of respondents used RMB payment and receivables; and 5% (3%) used RMB trade services. Companies using trade services demand significantly more RMB products than those not using trade services. Companies using trade services (all currencies) showed a decreasing need for RMB services, such as RMB deposits (45% in 4Q15 vs. 54% in 3Q15), as well as RMB payment and receivables (46% in 4Q15 vs. 48% in 3Q15). However, there was a slight increase in the use of RMB trade services (17% in 4Q15 vs. 16% in 3Q15). The average percentage of RMB cross-border trade settlement in companies total trade settlement has increased (14.2% in 4Q15 vs. 12.2% in 3Q15). DBS insights Business needs for RMB is a key indicator of actual RMB acceptance and usage levels at the corporate level. Use of these in the last 12 months remained largely stable despite the recent currency slide. This can be explained by the time-lag in business decisions. For example, customer orders/invoices denoted in RMB may have already been sent to the customer. It is neither possible to change the adopted currency instantaneously, nor is it feasible to do so. Many businesses may be taking a wait-and-see approach with regards to currency depreciation, and hence may not alter their RMB business needs immediately. For some businesses, transacting in RMB could help them to broaden their network of buyers /suppliers. That in turn improves their purchasing power. This explains why from a supply chain perspective, currency movements might be less relevant. 3. Business needs for RMB are tipped to decline in the short term, but RMB product use is expected to increase Respondents expected a decline in future business needs for RMB (RMB customer order/ invoices/ trade settlement). Fewer respondents (33% in 4Q15 vs. 37% in 3Q15) claimed that they would use RMB for these purposes in the next 12 months (Chart 4b), while the same percentage of respondents (9% in 4Q15 vs. 9% in 3Q15) claimed they expected to decrease usage in the next 12 months. Respondents cited the economic slowdown as a key factor affecting their decision to decrease usage for the above purposes in the next 12 months. Focusing on RMB trade settlement, much fewer respondents (37% vs. 47% in 3Q15) cited changes in the RMB exchange rate was one of their key considerations in deciding whether to switch to using RMB trade settlement. In comparison, more respondents (23% vs. 14% in 3Q15) cited customers requests for using RMB settlement as a key factor. Meanwhile, the intention to use RMB products in the next 12 months increased, with 44% of respondents intending to use MB products in next 12 months (vs. 41% in 3Q15). Among companies that use trade services, the intention to use RMB hedging products in the next 12 months increased (6% vs. 2% in 3Q15). Significantly more companies intending to use RMB products in next 12 months have plans to increase the use of RMB denominated structured 2

3 investment deposits (18% vs. 4% in 3Q15) and other currency linked to RMB structured investment deposits (9% vs. 4% in 3Q15). Relatively fewer respondents (39% vs. 53% in 3Q15) thought the volume of company business was the key factor driving the intention to increase their use of RMB products. Specifically, 23% (30%) cited the number of mainland customers as a key factor. In comparison, more respondents gauged that the exchange rate (8% vs. 1% in 3Q15) would impact their companies use of RMB products. However, over the whole course of our study, no consistent relationship between RMB appreciation expectations and RMB product usage was identified. DBS insights The use of RMB hedging products is generally increasing as large-sized corporates adopt various hedging strategies to mitigate exchange rate volatility. In particular, HKEx s USD/CNH futures reached a record open interest level of 24,018 contracts (notional value of US$2.4 bn) as of 4 Jan, and a MoM increase of 98% in turnover in December, attributable to increasing market participation. For small- and medium-sized enterprises, they tend to invoice in RMB because they may not have the experience and/or expertise to hedge foreign exchange risks effectively. Indeed, between 2009 and 2015, the share of RMB-settled cross-border trade rose from almost nothing to 30%. 4. Actual business performance and business outlook were similar to 3Q15 Business performance improved slightly after worsening persistently since 2Q14. In 4Q15, fewer respondents claimed that their business performance slowed down in the past 12 months (36% vs. 40% in 3Q15) (Chart 8a). Retail and import/export sectors reported deterioration in their business performance, citing economic slowdown as the main reason. The business performance outlook for the next 12 months was the most pessimistic since 4Q12, with only 13% (20%) respondents expecting improvements in business performance (Chart 8b). Similar to the previous quarter, 16% of respondents believe business will slow down by over 10%. More than half of the respondents in the wholesale sector (55% vs. 43% in 3Q15) expected businesses to slow down, and the same can be said for the retail sector (54% vs. 37% in 3Q15). DBS insights Broadly speaking, short-medium term risks in the Hong Kong economy are higher than they have been in the past few years. The retail market contraction is expected to continue amid a strong HKD, China s slowdown and the ongoing anti-corruption campaign. All of these are multi-year factors. Meanwhile, residential property prices have apparently reached their peak after more than doubling since the global financial crisis. Although a sudden collapse is unlikely, orderly adjustments would still negatively impact consumer and investor sentiment. In terms of factor cost adjustments, retail rents are already coming down. However, labour costs may adjust more slowly and mildly in comparison. Sectors such as business services, import/export, manufacturing and wholesale, remain pessimistic. 3

4 The outlook: help or hinder the capital controls in China Since the start of the year, China has been responding to capital outflows with regulations designed to reduce transactions of the RMB in offshore markets. While such regulations seem to able to restrain exchange rate volatility, they prolong China s liberalisation process. In response to the capital restrictions, firms shift transactions back onshore from the offshore market, which has greater liquidity and better infrastructure. This could have a negative impact on the risk-hedging capacity of market participants. For example, many Chinese enterprises, via overseas affiliates, have been tapping the offshore market for funding and executing export/import-based foreign currency transactions over the past few years. Increasing number of multinational corporations with operations in Asia has also managed their yuan exposure using offshore products. They will be forced to review these operations owing to the contracting offshore market. Furthermore, firms are now hesitant to remit funds onshore after PBoC limited outflows for banks providing yuan cash-pooling services for multinational corporations. The appetite for dim sum bonds is also waning due to the volatile exchange rates and interest rates offshore, evidenced by the fastest ever falling bond issuance amount. As such, balancing the benefits and costs of regulation is a major challenge for Chinese policymakers. About the index The DBS RMB Index for VVinning Enterprises (DRIVE) is the first index in the industry that is specifically designed to gauge the level of RMB usage, acceptance and penetration among companies registered in Hong Kong, as well as companies inclination to use RMB in the future. Although macroeconomic data on the circulation of offshore RMB is widely available, it is not able to offer an in-depth perspective on the developmental progress of Hong Kong as an offshore RMB centre. By focusing on the level of RMB usage and acceptance among Hong Kong-registered companies, this index aims to serve as the first benchmark to measure the pace of RMB internationalisation in Hong Kong. Policy-makers, businesses and investors alike will find this index a useful strategic tool over time. DBS Bank (Hong Kong) Limited commissioned an independent research house (Nielsen) to compile DRIVE and conduct the related survey on a quarterly basis, starting from the fourth quarter of Subsequent index values will be released on a quarterly basis and over time will reveal a lot more about the pace of development of Hong Kong as an offshore RMB centre. Corresponding policy recommendations can thus be drawn by analysing the future time series. In future, the index may be extended to cover other countries which are also offshore RMB centres. Methodology Decision-makers of companies registered in Hong Kong with annual sales turnover of HK$1 million or above were interviewed by telephone. A total of 210 companies were surveyed between October and November The sample comprised 200 SMEs (with annual sales turnover of HK$1 million to HK$1 billion) and 10 large corporations (with annual sales turnover of over HK$1 billion). The SMEs were selected via quota sampling based on company industry and sales turnover distribution released by the Census and Statistics Department (C&SD). The final sample was weighted to ensure it was representative of the business landscape in Hong Kong, referencing C&SD s distribution information (Tables 1 and 2). 4

5 Table 1: Company industry coverage Manufacturing Hotel and catering Construction Real estate Wholesale Information, communication Retailing Business services Import/ Export trade Community, personal services Transportation, Storage Table 2: Company annual sales turnover (source: C&SD 2011) Company size in terms of sales turnover Weighting Over HK$ 1 Billion 0.5% Over HK$50 Million to HK$1 Billion 6.7% Over HK$20 Million - HK$50 Million 8.8% Over HK$10 Million - HK$20 Million 6.8% Over HK$1 Million - HK$10 Million 77.2% Index computation and components The quarterly index aims to gauge the level of RMB usage, acceptance and penetration among Hong Kong-registered companies. It is based on six questions measuring four key dimensions driving business adoption and the internationalisation of the RMB in Hong Kong. They are: 1) Actual business performance in the last 12 months and expectations for the next 12 months; (2) Past and future demand for RMB in business operations; (3) Usage of RMB payment and receivables services and trade services; and (4) Ease of access to RMB financing. The index is the weighted average based on the factor analysis [2] applied to these key areas. The weightings are based on the statistical variance and correlation between each of the key areas. The calculated values are then rescaled to between 0 and 100. The index for each quarter is computed using the following formula: Index (i,j) = NN Index (i,j) = ii=1 jj =1 Wjj Q iiii KK NN Where, N = Sample size for current wave K = Number of selected questions Q*ij = Response of selected questions (adjusted to 0-100) Wj = Weighting for individual questions Notes [1] RMB deposits (including CNY time deposit/cny deposit, current and saving accounts), RMB payment and receivables services (including Auto Pay, TT/ Remittance). RMB investment services, RMB financing services (including loans, issuing bonds, securities etc.), RMB trade services (including trade finance, L/C, bills etc.), RMB insurance products, RMB MPF products, RMB hedging products. [2] Factor analysis is a statistical treatment to provide approximation to describe the variability of the parameters used to calculate the index. 5

6 About The Nielsen Company The Nielsen Company (NYSE: NLSN) is a global information and measurement company with leading market positions in marketing and consumer information, television and other media measurement, online intelligence, mobile measurement, trade shows and related assets. The company has a presence in approximately 100 countries, with headquarters in New York, USA. For more information on The Nielsen Company, visit 6

7 Key charts and graphs Chart 1: DRIVE Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Chart 2: Intention to apply for RMB financing in the next 12 months Yes 3% No 97% Chart 3: RMB exchange rate expectations 5% 4% 1% 28% 1% 12% 20% 2% 5% 9% 39% 40% 39% 30% 34% 12% 17% 3% 30% 2% 35% 15% 44% 4% 18% 2% 13% 6% 20% 11% Appreciate by over 5% Apperciate by 2-5% No change Don't know Depreciate by over 5% Depreciate by 2-5% 7

8 Chart 4a: Change in RMB customer order/invoices in P12M 30% 26% 33% 33% 31% Did not use 70% 74% 67% 67% 69% Used in P12M, excluding those answering "unsure" Chart 4b: Change in RMB customer order/invoices in N12M 52% 36% 36% 38% 34% 48% 64% 64% 62% 66% Did not use Will use in N12M, excluding those answering "unsure" Chart 5: Use of RMB payment and receivables 28% 24% 25% 24% 25% Currently using or will consider in N12M 8

9 Chart 6: Use of RMB trade services 10% 5% 5% 4% 7% Currently using or will consider in N12M Chart 7: Use of RMB products or services 29% 27% 30% 28% 26% Used any RMB products in P12M 72% 73% 70% 72% 74% Did not use any RMB products in P12M Chart 8a: Business performance in the past 12 months (sales turnover) 12% 6% 10% 5% 13% 19% 14% 16% 42% 42% 42% 37% 6% 10% 46% More than +10% +5-10% No change 17% 17% 17% 17% 17% 13% 12% 14% 23% 19% 3% 5% 2% 2% 1% Don't know More than -10% -5-10% 9

10 Chart 8b: Business performance outlook in the next 12 months (sales turnover) 6% 9% 26% 19% 8% 12% 42% 49% 49% 4% 4% 16% 9% 40% 46% More than +10% +5-10% No change 19% 13% 20% 5% 23% 23% 6% 5% 8% 1% 3% 16% 16% 1% 2% Don't know More than -10% -5-10% 10

11 Recent Research SG: the next growth driver 4 Feb 16 JP: BOJ into uncharted territory 2 Feb 16 CNH: will capital controls help? 2 Feb 16 FX: Not just about CNY 1 Feb 16 IN: RBI to await budget cues 1 Feb 16 Rates: Global rates roundup/ chart-pack 29 Jan 16 CN: when is a trillion not a trillion? 29 Jan 16 IN: fading boost from low oil prices 28 Jan 16 TH: consumption the weak link 25 Jan 16 CN: how to end the vicious cycle 21 Jan 16 Global crude: still spilling onto the floor 20 Jan 16 TW: after the election 19 Jan 16 IN: back at fiscal crossroads 19 Jan 16 CNH: Taken the RMB episode 15 Jan 16 Rates: UST curve: belly s too big 15 Jan 16 CN: services and manufacturing are 14 Jan 16 codependent IN: prepared, not immune 16 Dec 15 Qtrly: Economics-Markets-Strategy 1Q16 10 Dec 15 Holiday Heresies Dec 15 ID: manufacturing still a drag 3 Dec 15 CNH: billion dollar baby 16 Nov 15 EZ: will more QE help? 4 Nov 15 Rates: regional rates rundown 2 Nov 15 FX: monetary policy divergences intact 2 Nov 15 Rates: UST Curve - the next flattening leg 30 Oct 15 JP: deciphering the BOJ 23 Oct 15 ID: no room to cut 12 Oct 15 IN: the lowdown in exports 9 Oct 15 SG: technical recession 6 Oct 15 SGD: a lower policy band 6 Oct 15 CN: resolving the known unknowns 5 Oct 15 G4: who s winning the currency wars? 25 Sep 15 IN: RBI another window opens 22 Sep 15 Japan s go global experience (3) 21 Sep 15 SG: mandate for inclusive policy 17 Sep 15 Qtrly: Economics-Markets-Strategy 4Q15 10 Sep 15 Triangulating Asian Angst: the US, China 7 Sep 15 and the 97 question CN: the need for institutional reform 21 Aug 15 SG: when China devalues 20 Aug 15 TW: the impact of yuan devaluation 19 Aug 15 SG: saving manufacturing 17 Aug 15 IN: inflation remains key 6 Aug 15 IN Gilts: greater foreign ownership mooted 4 Aug 15 IDgov bonds: 2Y sector looks attractive 31 Jul 15 JP: Japan s go global experience (2) 29 Jul 15 IN: harnessing demographic dividend 27 Jul 15 CN: fiscal reforms to accelerate (2) 24 Jul 15 Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. 11