Offshore Renminbi (CNH) Market: Opportunities Continue to Expand Silicon Valley Bank. January 13, 2012

Transcription

1 Offshore Renminbi (CNH) Market: Opportunities Continue to Expand Silicon Valley Bank January 13,

2 Panelists Ed Sauve, Senior Advisor GFS, Silicon Valley Bank Mark Noble, Senior Foreign Exchange Trader, Silicon Valley Bank Paul Kao, Senior Foreign Exchange Trader, Silicon Valley Bank 2

3 Currency Overview Agenda Offshore RMB (CNH) Market SVB China Update Case Studies China 2012 Outlook 3

4 Currency Overview Ed Sauve Senior Foreign Global Financial Services Silicon Valley Bank 4

5 A Perspective of China and Its Currency Historically, China has been connected to the world through trade but not its currency Making the renminbi a global currency will.. Create a currency link with the world beyond trade Create the opportunity to hold RMB as a link to value (investments) Create confidence for China as RMB moves to become a reserve currency The RMB trade settlement pilot was originally announced in Dec U.S. financial crisis in 2008 vastly accelerated the PBOC s plans Rising doubts about the willingness of the USD to maintain its value Euro is seen as not a good alternative China needs to balance its desire to develop a global (appreciating) currency without impacting its economic (export) engine 5

6 Onshore RMB (CNY) The official domestic currency of the People s Republic of China is the renminbi (RMB) Onshore RMB is commonly referred to as CNY Onshore RMB structure Currency closely held/circulated within China FX flows monitored by its central bank (PBoC) Local FX hedging vehicles limited in scope Global pressure to revalue/appreciate RMB continues to build PRC resists freely floating its currency Managed float approach preferred Long-term goal is to elevate RMB to reserve currency status 6

7 Offshore RMB (CNH) In July 2010, PBoC and Hong Kong Monetary Authority (HKMA) launched the offshore RMB market Offshore RMB referred to as CNH Seen as a first step toward internationalizing China s currency Offshore RMB structure Two-way conversions for Hong Kong-based transactions Standard FX hedging products available CNH spot rates closely linked to CNY Trade settlement CNH cross-border settlements to/from the Mainland currently restricted No settlement restrictions for Hong Kong-based transactions Mainland companies expanding CNH capabilities and presence 7

8 Offshore RMB (CNH) Impact for Companies Potential international trade changes PBoC actively pursuing local companies to invoice in RMB vs. USD Cross-border payments must be trade-related to avoid restrictions Local currency pricing adjustments possible by accepting FX risk Currency risk concerns The need for a structured currency risk management program should be evaluated Active cash management practices utilized when parking CNH funds New opportunities RMB pricing enables U.S. company to control FX risk Better clarity for ongoing price movements Offshore investment via evolving dim sum bond market enhanced 8

9 Offshore RMB (CNH) Market Mark Noble Senior Foreign Exchange Trader, Silicon Valley Bank 9

10 CNH Development Milestones Accelerated CNH Market Since Mid-2010 Cross-border CNY settlement CNH investment products Movement of CNH into the Mainland August 2011: CNY settlement scheme expanded nationwide June 2010: Expanded RMB trade settlement pilot scheme to cover 20 provinces and cities. October 2011: New guidelines allowing offshore RMB for FDI transactions (subject to normal approvals) April 2011: First RMB IPO by Hui Xian, listed on the Hong Kong Exchange February 2010: HKMA allowed participating banks to develop CNY business as long as the related flows do not entail back to the mainland January 2011: RMB Overseas Direct Investment allowing Chinese enterprises to conduct overseas direct investment August 2010: opened onshore RMB-denominated bonds to qualified offshore institutions to a limited extent and allowed participating banks to invest CNY liquidity in onshore bonds (subject to a quota) 10

11 Onshore vs. Offshore Overview Offshore RMB market continues to be walled off from the Mainland economy via the PRC s goal to minimize any negative impact China continues to maintain tight restrictions via RMB cross-border Current Account: Trade settlement is permitted but closely monitored Capital Account: Foreign Direct Investment (FDI) must be approved by the Ministry of Commerce No restrictions for offshore (CNH) flows/uses outside of China Restrictions apply if a payment crosses the Mainland border Restrictions are enforced in China through its local banks 11

12 CNH Market Characteristics CNH market represents new opportunity for international investors to gain exposure to RMB Trade settlement is still the ultimate goal Hong Kong s dim sum bond market growth unprecedented Hong Kong is currently the primary offshore RMB financial center London and Singapore are seen to follow Growth of CNH market linked to rapid increase of RMB-denominated foreign trade Cross-border flows via Hong Kong and the Mainland a catalyst for growth RMB denominated financial products continue to evolve 12

13 Trade Settlement Regulations Chinese counterparty locations now throughout China Previously only 20 designated provinces or cities were allowed Chinese counterparty must be approved as a Mainland Designated Enterprise (MDE) primarily for trade-related goods Established to ensure legitimate participants Import to China (Outbound Payment) Export From China (Inbound Payment) Goods No MDE Restrictions MDE Only Services No MDE Restrictions No MDE Restrictions 13

14 CNH FX Market Overview CNH FX market began trading in late July 2010 As of June 2011, RMB share in world FX trade is less than 1% Expected to increase to 5% by 2020 Normal bid/ask pricing structure applies Onshore-to-offshore trading relationship can be volatile Market-driven disconnects can happen Daily liquidity continues to grow dramatically Spot approx. $1.5B Forward approx. $1B Offshore NDF market continues to reflect deeper appreciation 14

15 CNH Trades at a Premium Most of the Time RMB Onshore and Offshore Exchange Rates CNY CNH Source: Bloomberg and SVB 15

16 China Update Mark Noble and Paul Kao Silicon Valley Bank 16

17 Chinese Currency Goal CNY internationalization Capital account liberalization CNH market development 17

18 CNY Settlement Grows Rapidly Since Mid-2010 CNY monthly settlement trade volumes grow from less than 20b RMB in June 2010 to more than 150b RMB in May CNY settlement trade volumes-rmb bn J 2010 A S O N D J 2011 F M A M Sources: Reuters 18

19 Accelerating Growth in CNH Deposits RMB deposits in Hong Kong s banks have exploded from less than 90B RMB in June 2010 to more than half a trillion RMB (572B RMB) in Jul Mainly attributed to an increase in RMB receipts by corporate customers through trade settlement transactions. The number of authorized institutions engaged in RMB business has increased from 77 in June 2010 to 128 in Jul Also attributed to RMB appreciation expectation Source: HKMA 19

20 High Demand in CNH Bonds The CNH bond market has developed at an extraordinary pace since the deregulation of offshore RMB in mid Issuance of offshore RMB bonds in the first half of 2011 stands at 69.4B RMB, (according to Thomson Reuter s data), compared to 42.6B RMB in all of 2010 Still in a preliminary stage. Only RMB 160B of CNH bonds outstanding which grows much slower than CNH deposits demand CNH Deposits, 572 RMB bn CNH Outstanding Bonds, (Jul) Source: HKMA 20

21 Government Initiatives Taking steps towards the internationalization of the RMB The Chinese authorities have pushed harder for RMB internationalization since the global financial crisis China supports Hong Kong to become an offshore RMB center New centers RQFII Likely next candidates would be Singapore or Malaysia, two jurisdictions with relatively developed financial markets, as well as close commercial and regulatory relationships with China Possibly New York and London will also take part in CNH market in future May start soon (before the end of 2011), with an initial size of 20B RMB, allowing RMB funds raised in Hong Kong to be invested in the mainland's securities market Helps broaden the channels for RMB in the offshore market to flow back to the mainland and the option will first be open to domestic fund managers familiar with the A-share market and subsidiaries of securities companies in Hong Kong China may tighten its control over the rapidly growing CNH Too much RMB flowing back into mainland will impact monetary policy. Controlling inflation continues to be a top priority Rapid growth of CNH deposits may affect confidence in the HKD 21

22 Case Studies Paul Kao Senior Foreign Exchange Trader, Silicon Valley Bank 22

23 Hedging with CNH Client profile Need Foreign-based client investing U.S. dollars into China Hedge against CNY appreciation Option 2: Forward Purchase forward contract None Restrictions Option 1: MCA Spot contract to MCA Option 3: Option Purchase option contract Chinese CNY account * Non-U.S.-based or non-china- based 23

24 Payments to Hong Kong-based Supplier Using CNH Client profile Need U.S. based client with offshore suppliers Pay offshore supplier in CNH Option 1: FX Send CNH FX wire from USD DDA Option 2: MCA Send CNH from RMB MCA None Restrictions Offshore supplier RMB account 24

25 Receivables from Hong Kong-based Buyer in CNH Client profile Need U.S. based manufacturer selling to an offshore buyer Receive payment in CNH Restrictions Option 1: FX Receive RMB FX wire into SVB account Option 2: MCA Receive RMB into client s RMB MCA None FX trade to client USD DDA 25

26 Payments to Mainland China Supplier Using CNH Client profile Need U.S. based client with supplier located in China Pay Chinese supplier in RMB Option 1: FX Send RMB FX wire (CNH) from USD DDA Chinese supplier RMB account Option 2: MCA Send RMB wire (CNH) from RMB MCA Restrictions Goods MDE Approved province Services SAFE approval Note: Not yet common but will increase over time 26

27 China 2012 Outlook Economic Outlook Government Outlook Offshore RMB Outlook 27

28 Questions? 28

29 Biographies 29

30 Ed Sauve Ed Sauve is the senior advisor for the Global Financial Services Group of Silicon Valley Bank and he has 20 plus years of commercial banking experience including provision of credit and delivery of a wide variety of financial services to small business, middle market, institutional and multi-national companies. Senior Foreign Exchange Advisor esauve@svb.com Sauve's international banking experience includes assignments in London, Middle East and Hong Kong. He opened Middle East Area Representative office for First Interstate Bank in the United Arab Emirates and led a program to obtain license to open its bank office in Beijing, China. Currently he supports the international activities of SVB's Southern California-based clients. His domestic experience includes management of regional corporate centers in Los Angeles and the South Bay for Wells Fargo/First Interstate, as well as regional responsibility for marketing Silicon Valley Bank's short-term money market capabilities in Southern California. He has transaction experience in commercial lending, cash management, corporate finance, short-term money market investments and international banking. 30

31 Mark Noble Mark Noble is a senior foreign exchange advisor with Silicon Valley Bank. He designs custom hedging strategies for clients with complex currency-related issues, advises clients in developing, implementing and monitoring foreign exchange strategies and educates clients in understanding foreign exchange products. Senior Foreign Exchange Trader Mnoble@svb.com Noble has more than 20 years of experience in the financial industry with a dedicated focus on foreign exchanges services and treasury management products. Before joining SVB in 2007, Noble worked for Commonwealth Foreign Exchange and held multiple management positions including director of currency trading and senior manager of financial operations. Noble oversaw daily trading, client treasury management, account reconciliation and the timely delivery of client payments through various global treasury management banks. Over his career, Noble has provided foreign exchange consulting services, executed hedging requirements utilizing spot, forward, swaps and option contracts and coordinated the issuance and maintenance of credit lines. While with a large pharmaceutical firm, Syntex Corporation, he managed many corporate treasury activities from a multi-million dollar foreign exchange risk portfolio, to the development and implementation a foreign exchange module as a part of its internal banking system to facilitate management and mitigate risk. Noble holds a bachelor s degree in business administration from California State University in Fullerton. 31

32 Paul Kao Paul Kao is a senior foreign exchange trader with Silicon Valley Bank. With over 15 years experiences in foreign exchange, Kao provides FX risk management advisory to a portfolio of top-tier Venture Capital, Private Equity and multi-national high-tech firms. Kao provides clients with customized FX research and analysis, assisting them in identifying FX risk, minimizing FX cost and maximizing profits through spot, forwards, options and structured product markets. Senior Foreign Exchange Trader PKao@svb.com Kao also has extensive experience in international banking, commercial lending and private banking. Before joining the FX team at SVB, Kao was a member of Silicon Valley Bank's Northern Technology team, responsible for underwriting credit facilities to publicly traded technology companies. Prior to joining SVB, Kao worked for Bank of America, Private Banking Group, managing a portfolio of high net-worth individual accounts. Kao also worked in Asia for 5 years for several major money center banks. Kao holds a bachelor s degree in finance from University of North Carolina at Charlotte and has been a member of Monte Jade Science & Technology Association since

33 Disclosures This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. SVB Securities is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial Group. Member FINRA and SIPC. Products offered by SVB Securities are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value

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