RMB INTERNATIONALIZATION

RMB INTERNATIONALIZATION

RMB INTERNATIONALIZATION CHAPTER: YUAN GLOBALIZATION SHIFTS COMMODITIES TRADING China Touts Yuan on World Stage to Bolster Clout in Commodities Analysts Yi Zhu (Metals) & Francis Chan (Banks) China s recent steps to promote its currency for greater global acceptance include setting up five offshore yuan centers, launching the Shanghai-Hong Kong Stock Connect, and widening the yuan-trading band. The rise of the currency in global markets may promote trading of yuan-denominated commodities and increase China s ability to influence prices. It may also help China s smallscale metal producers gain access to offshore-funding channels. A more global yuan could boost revenue for market leaders in the offshore yuan businesses, including HSBC and Standard Chartered. It may also increase pricing power for major Chinese metal producers including Chalco and Jiangxi Copper. Yuan Rises to World s Fifth-Largest Currency by Global Payments Analyst Francis Chan Jun 16, 2015 The yuan became the world s fifth largest payments currency in April, with a 2.1% share. That s up seven-fold from a 0.3% share and No. 17 ranking in December 2011. China s steps to promote its currency since January 2014 include setting up five new offshore yuan centers, launching the Shanghai Hong Kong Stock Connect, and widening the yuan trading band. Further global acceptance of the yuan hinges on an IMF decision expected later this year on whether to include it in the Special Drawing Rights basket. Banking institutions operated in yuan increased from 900 to 10,000 in the four years ended 2014, according to SWIFT. HSBC is the market leader in the offshore yuan bond and RQFII businesses, followed by Standard Chartered. China Banks ICBC, CCB and Bocom are also competitors.

Yuan Emerging as Global Currency Would Lift China Pricing Power Analysts Yi Zhu (Metals) & Francis Chan (Banks) The yuan s rise in global markets may promote commodities trading denominated in China s currency, increasing its pricing power. While China is the largest importer and consumer of iron ore, copper ore, bauxite and other goods, it s a price taker, unable to set the terms because most commodities are still denominated in dollars. International commodity trading uses mostly overseas exchanges for benchmarks, and transactions are settled in dollars. Major Chinese metal producers including Chalco, Jiangxi Copper, China Hongqiao would improve their market positions if China increases pricing power for commodities. Global Yuan May Add Supply, Cut Forex Risk for China Steel Users Analysts Steve Man (Autos) & Yi Zhu (Metals) China s steel users could gain greater access to overseas markets and more bargaining power on prices after internationalization of the yuan. Local manufacturers could choose to buy steel overseas if the yuan was easily converted to other currencies for settling payments, or to demand settlement in yuan to reduce exchange-rate risks. Machinery and autos accounted for as much as 25% of China s total steel demand last year. Zoomlion, Lonking and Sany Heavy are the largest mining and construction equipment manufacturers listed in Hong Kong. They may source from domestic steel producers such as Magang and Baosteel and global producers such as U.S. Steel and ArcelorMittal.

RMB INTERNATIONALIZATION China Still Depends on London for Base-Metal Trading, Pricing Analysts Yi Zhu (Metals) & Francis Chan (Banks) China, the world s largest metal producer and consumer, relies on overseas exchanges for trading and pricing. Base-metal trading on the London Metal Exchange (LME), for example, accounts for more than 80% of global volume, overwhelming the Shanghai Futures Exchange (SHFE). LME s approved warehouses, with the most locations, are the best indicators of global supply and demand for metals. Settlement prices on the LME are also used as benchmarks for most physical trading of metals. Major Chinese metal producers including Chalco and Jiangxi Copper are trading through SHFE, which has a less dominant position than the LME. China Needs to Fix Trading, Delivery Issues to Get Pricing Power Analysts Yi Zhu (Metals) & Francis Chan (Banks) Chinese metals producers face trading and delivery obstacles. The government restricts their access to trading on the LME, which has no warehouses in China. Overseas investors, meanwhile, can t trade on the SHFE, which has no inventory storage outside of China. Beijing is working to globalize the yuan, deregulate interest rates, and set up free-trade zones to strengthen the financialservices industry. Even though Hong Kong Exchanges bought the LME in 2012, full integration has yet to materialize.

China s Miners Could Gain Funding Access with More Global Yuan Analysts Francis Chan (Banks) & Yi Zhu (Metals) Jun 22, 2015 The yuan s emergence as a more global currency could open up offshore-funding channels for Chinese mining companies, especially smaller ones. The Chinese currency s liquidity abroad may rise significantly if it is included later this year in the IMF s basket of special drawing rights (SDR). Smaller Chinese miners, which are mostly cut off from domestic bank financing and aren t big enough to raise dollar-denominated debts offshore, may tap offshore yuan funding to improve their financial positions. ICBC, China Construction, AgBank, Bank of China, China Merchants and Minsheng are among China s largest lenders that disclose mining-loan balances. They had a total 1.1 trillion yuan ($180 billion) of mining loans, or an average 2.8% of gross lending, as of 2014. Hong Kong Dominance of Yuan Transactions Boosts Revenue at HSBC Analysts Francis Chan & Jonathan Tyce Jun 16, 2015 Hong Kong remains the dominant offshore-yuan center, comprising about 70% of payment traffic. Five new offshore centers have opened in China since January 2014. Singapore and the U.K. follow Hong Kong with a combined share of 12% in April. Hong Kong s lead may boost revenue from yuan payments at the city s largest lenders, including HSBC, BOC Hong Kong, Standard Chartered and DBS. HSBC set a target of raising yuan-business revenue to $2 billion to $2.5 billion by 2017, up from $1.7 billion last year.

RMB INTERNATIONALIZATION China s Financial-System Restrictions Impede a Fully Global Yuan Analyst Tim Craighead Jun 11, 2015 The yuan isn t fully convertible, and China hasn t achieved an open capital account. These may remain hurdles for the currency to be included in the Special Drawing Rights (SDR) basket established by the IMF in its five-year review of global reserve currencies. China is starting to remove its capital and financial-system controls, as evidenced by last year s launch of the Shanghai Hong Kong Stock Connect and liberalizing of lending rates. The SDR decision requires 70% approval from IMF member states. China s yuan could take a share of up to 10% of globalreserve currencies if it were to be included in the SDR basket. This would encourage its use worldwide, boosting revenue for market leaders in offshore yuan businesses, such as HSBC and Standard Chartered. China s Exchange Connections Broaden Sector, Stock Opportunities Analyst Tim Craighead Jun 11, 2015 The Shanghai-Hong Kong Stock Connect gives global investors new access to the world s manufacturing hub. Hundreds of midto large-cap industrial, material and health-care stocks listed in Shanghai are included. A potential extension to selected Shenzhenlisted shares could add more technology, consumer and industrial exposure. Meanwhile, mainland investors can buy shares in more than 260 companies traded in Hong Kong in sectors such as telecom and consumer, which were previously inaccessible. Sands China, Galaxy Entertainment, Swire Pacific, China Telecom, China Mobile, Hong Kong & China Gas and Cnooc are examples of new large-cap stocks in the consumer, communications and energy sectors that Chinese investors can now buy and sell through the stock link.

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