China and Hong Kong Forex Market Developments RMB made the nine-month peak and FX reserves further expanded

China and Hong Kong Forex Market Developments RMB made the nine-month peak and FX reserves further expanded August 217 Monthly publication Alicia Garcia Herrero Chief Economist Asia Pacific +852 39-868 alicia.garciaherrero@ap.natixis.com Jianwei Xu Senior Economist +852 39-834 jianwei.xu@ap.natixis.com Kathleen Chen +852 39-8592 kathleen.chen-ext@ap.natixis.com

Key messages RMB entered gradual appreciation over the past month and reached a nine-month peak (below 6.7 against USD) mainly on the back of a weak USD and domestic economy that realized strong growth in the second quarter. USDCNY and USDCNH both appreciated noticeably (+.54% and +.79%, respectively) against the greenback in July. Interbank rates (SHIBOR and HIBOR) all calmed down and continued to normalize, reflecting generally adequate liquidity in the banking system. The rates kept stable despite that a number of MLF matured in July. The forward market is generally optimistic about RMB s appreciation potentials in the second half and forward rates continued to shift down. China s FX reserves recorded the rally for the 6 th consecutive month to the highest level entering 217 (+.78% MoM to USD38bn) thanks to the weak greenback and buoyant exports. However, capital outflows continued, despite that the government has taken tighter measures against capital flight. RMB depreciated.6% against CFETs in July while the currency appreciated against USD. But the currency so far has showed strong momentum by appreciating against both USD and CFETs. The PBoC paused the OMOs from late June to early July and resumed with 7-day and 14-day (instead of 28-day) reverse repos to provide short-term liquidity. In the second half, we expect RMB to face some downward volatility given that the Fed is expected to hike rate and the external sector would struggle as potential uncertainty in the Sino-US builds up. In the medium and long run, the currency would reflect more fundamentals than the USD move. 2

Tables of contents 1. CNH market CNH, CNY and spread CNH HIBOR and CNH forward curve RMB forward and NDF curves FX Reserves and net conversion of FX by banks and clients CNH HIBOR, SHIBOR and CNH CCS 5 6 7 8 9 2. CNY market CNY and trading band CFETS RMB Index CNY forward curves and fixing PBoC open market operations, SHIBOR and sovereign yields 11 12 13 14 3

1. Key Development Offshore (CNH) Onshore Offshore 4

RMB began gradual appreciation over the past month and reached the ninemonth peak mainly on the back of the weak greenback and a strong economy. CNH appreciated.8% against USD in July along with CNY. 7. 6.9 6.8 6.7 6.6 CNH and CNY Spread, CNH-CNY (RHS) USDCNY USDCNH.25.2.15.1 7. 6.9 CNH and CNY (short timeframe) Spread, CNH-CNY (RHS) USDCNY USDCNH.25.2.15.1 6.5 6.4 6.3 6.2.5. -.5 6.8 6.7.5. -.5 6.1 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 -.1 Dec Jan Feb Mar Apr May Jun Jul Aug -.1 Positive spread indicates offshore yuan is weaker than onshore. Positive spread indicates offshore yuan is weaker than onshore. USDCNH CNH Depreciation (-,%) End of Period High of Period Low of Period August (till 9 th ) +.52 6.6921 6.7351 6.6921 July 217 +.79 6.7271 6.861 6.7271 216-6.2 6.9761 6.9761 6.4561 5

CNH HIBOR curve continued to normalize amid stronger RMB and eased hunt for liquidity. The forward rates showed that the market also expects RMB to carry on the positive momentum into the future. CNH HIBOR (%) USDCNH forward 1 9-Aug-17 9-Jun-17 7-Jul-17 9-May-17 1 7.1 9-Aug-17 7-Jul-17 7-Jun-17 6-Mar-17 7.1 9 8 7 6 5 4 3 2 1 9 8 7 6 5 4 3 2 1 7.5 7. 6.9 6.8 6.7 7.5 7. 6.9 6.8 ON TN 1W 2W 1M 2M 3M 6M 9M 1Y Spot 1M 3M 6M 12M 6.7 6 6

CNH and CNY forward curves shifted down and signalled convergence, indicating that the market sentiment twisted towards optimism of the currency after the appreciation so far. 7.1 7.5 7. RMB forward curves CNY (9 Aug 17) CNY (3 Jun 17) CNH (9 Aug 17) CNH (3 Jun 17) NDF (9 Aug 17) NDF (3 Jun 17) 7.1 7.5 7. 7.4 7.2 7. 6M NDF 3M NDF 12M NDF NDF curve over time 7.4 7.2 7. 6.9 6.9 6.8 6.8 6.6 6.6 6.8 6.7 6.8 6.7 6.4 6.2 6.4 6.2 Spot 1M 3M 6M 12M 6. Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 6. Onshore Offshore 7

FX reserves recorded the rally largely thanks to the weak greenback and buoyant exports. However, capital outflows continued, despite that the government has taken tighter measures against capital flight. 15 1 5-5 -1 China FX Reserves and Currency Spread Reserves (mom change, US$ bn) Spread (CNH-CNY, bps, rhs) 8 6 4 2-2 -4-6 -15-8 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 15 1 5-5 Change of FX position of banks and their clients (USD bn) -1 Reduced FX held -15 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Change of FX position of banks Change of FX position of banks' clients Total change, negative implies less FX held by banks and their clients 15 1 5-5 -1-15 Onshore Offshore 8

Interbank rates all went calm over the past month, reflecting generally adequate liquidity in the banking system. CNH HIBOR and SHIBOR HIBOR CNH 6M HIBOR CNH 1M CNH/USD CCS 8. 7.5 7. 6.5 6. 5.5 5. 4.5 4. 3.5 3. SHIBOR 6M SHIBOR 1M 8. 7.5 7. 6.5 6. 5.5 5. 4.5 4. 3.5 3. 16 14 12 1 8 6 4 2 CCS CNH 6M CCS CNH 1M 16 14 12 1 8 6 4 2 1-Aug 2-Jul 29-Jun 8-Jun 18-May 27-Apr 6-Apr 16-Mar 23-Feb 2-Feb 12-Jan 22-Dec 1-Dec 2-Aug 19-Jul 5-Jul 21-Jun 7-Jun 24-May 1-May 26-Apr 12-Apr 29-Mar 15-Mar 1-Mar 15-Feb 1-Feb Onshore Offshore 9

2. The onshore market (CNY) Onshore Offshore 1

CNY appreciated noticeably (+.54%) against the greenback in July. It remains to see whether the positive momentum could persist to the second half when the Fed is expected to hike the rate. 7.2 7. CNY and Trading Band Spread (CNH-CNY, rhs) USDCNY Trading Band.2.15 7.2 7.1 CNY and Trading Band (short time frame) Spread (CNH-CNY, rhs) USDCNY Trading Band.2.15 6.8.1 7..1 6.6 6.4.5 6.9 6.8.5 6.2 6.7 6. -.5 6.6 -.5 5.8 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 -.1 6.5 1-Aug 1-Oct 1-Dec 1-Feb 1-Apr 1-Jun 1-Aug -.1 USDCNY CNY Depreciation (-,%) End of Period High of Period Low of Period August (till 9 th ) +.78 6.6743 6.7289 6.6743 June 217 +.8 6.7266 7 6.7266 216-6.945 6.9615 6.4536 11

RMB depreciated.6% against CFETs in July while the currency appreciated against USD. The currency so far has showed strong momentum by appreciating against both USD and CFETs. 96 95 94 93 92 91 9 CFETS RMB Index (214=1) and USDCNY Dec-16 Mar-17 Jun-17 CEFTS RMB Index USDCNY (inverted) 6.7 6.8 6.9 7 THB 2.9% GBP 3.2% SGD 3.2% MYR 3.8% HKD 4.3% Source: CEFTS, Natixis RUB 2.6% CEFTS RMB Index Composition CAD 2.2% AUD 4.4% Others 12.5% KRW 1.8% JPY 11.5% USD 22.4% EUR 16.3% CFETS RMB RMB Depreciation (-,%) Last High Low August (till 9 th ) +.99 93.92 93.92 92.95 July 217 -.58 92.99 93.69 92.82 216-6.13 94.72 1.4 93.67 12

CNY forward shifted downward given the strong currency in July and moderated depreciation expectation among market participants. CNY forward curves 7.1 3-Jun-17 8/9/217 7.5 7. 6.9 6.8 6.7 6.6 Spot 1M 3M 6M 12M 7.1 7.5 7. 6.9 6.8 6.7 6.6 CNY and fixing 7. USDCNY Fixing 7. 6.9 6.9 6.8 6.8 6.7 6.7 6.6 6.6 6.55 6.55 6.5 6.5 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Onshore Offshore 13

12/27/215 1/17/216 2/7/216 2/28/216 3/2/216 4/1/216 5/1/216 5/22/216 6/12/216 7/3/216 7/24/216 8/14/216 9/4/216 9/25/216 1/16/216 11/6/216 11/27/216 12/18/216 1/8/217 1/29/217 2/19/217 3/12/217 4/2/217 4/23/217 5/14/217 6/4/217 6/25/217 7/16/217 8/6/217 SHIBOR continued its normalization in July amid liquidity injection by the PBoC. The central bank paused OMOs for 14 days from late June to early July, and resumed with 7-day and 14-day reverse repos in mid-july. 2 15 1 5 China PBoC Weekly Open Market Operations (CNY bn) 2 15 1 5 5. 4.5 4. 3.5 3. 2.5 2. SHIBOR fixing yield curve (%) 8/9/217 6/3/217 1W 2W 1M 3M 6M 9M 1Y 5. 4.5 4. 3.5 3. 2.5 2. -5-5 -1-1 4.5 Sovereign yield curve (%) 4.5 4 4 SLO Matured Reverse Repo Matured Repo Turnover SLO Issue Reverse Repo Turnover Repo Matured MLF SLF Net Net injection CNY (bn) June 217 +134 July 217 +439 August 217 (till 7 th ) -18 3.5 3 8/9/217 2.5 6/3/217 2 1Y 3Y 7Y 1Y 3Y 3.5 3 2.5 2 Onshore Offshore 14

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