Offshore RMB Market Update Ricky Li Economics and Strategic Planning Department Bank of China (Hong Kong) Limited November 2014
Offshore RMB Market Update A. Offshore RMB Bond Market Update B. RMB Internationalization Process 2
Rapid growth in offshore RMB bond market The primary issuances of offshore RMB bond reached a record high this year Offshore RMB Bond Primary Issuances Tenor Distribution 180 172 30yr 0.13% 160 20yr 0.25% 140 15yr 1.50% 120 105 112 104 100 80 60 40 35 20 10 12 16 0 2007 2008 2009 2010 2011 2012 2013 2014 Source: BOCHK, Bloomberg (Sep) 10yr 9yr 7yr 5yr 3yr 2yr <2yr 2.50% 0.31% 2.12% 2.60% 15.67% 23.82% 51.09% 0% 10% 20% 30% 40% 50% 60% Note: Include all issuances from 2007 to 2013. Source: BOCHK From 2007 to 2014, the total issue size of dim sum bonds has exceeded RMB560 billion. Tenor - 2 and 3 year remain the most common for offshore RMB bonds, demand for 5 year or above is growing for investment grade credits. Bonds maturing in 2014 amounted to around RMB82 billion 3
Offshore RMB Bond Market Expanding Globally Driven by the increasing interests from both issuers and investors, many other international financial centers are keen get involved in offshore RMB business. In 2012: London First RMB bond was issued by HSBC In 2013: RMB clearing bank was established in Taiwan and Singapore. Taiwan Formosa Bond was first issued by China Trust Bank. Singapore Lion City Bond : Issuance by HSBC, SCB and BOC Singapore Branch In 2014: Offshore RMB bond has expanded to more ex-hong Kong offshore markets Frankfurt: by KFW Bankengruppe Sydney: by BOC Sydney branch Luxembourg by BOC Luxembourg Branch Paris by BOC Paris Branch About 11 non-hong Kong offshore regions have issued offshore RMB bonds, the value of issuance totaling RMB 146.1 billion. Since 2014, London market has adjusted its strategy by underwriting sovereign bonds to promote market development. 4
Increasing sovereign bond issuances Sovereign and quasi-sovereign RMB bond issuances account for about 30% of the entire offshore RMB bond issuances China Government Bond: China s Ministry of Finance has issued RMB bonds in Hong Kong for the seven consecutive years. As an offshore RMB bonds issuance platform, Hong Kong is also recognized as the Chinese offshore sovereign bond market The value of issuance has increased from only RMB 6 billion in 2009 to 28 billion in 2014 Mainland China policy banks: In 2014 Q1-Q3, China Development Bank, Export-Import Bank and the Agricultural Development Bank have issued bonds valued at RMB 17.5 billion in Hong Kong. The total issuance is valued at RMB 63 billion during 2007-2014. International agencies and foreign local governments: Asian Development Bank, World Bank, KfW of Germany and the Province of British Columbia, Canada. Foreign governments The issuance of RMB bonds by British government makes the sovereign bond issuance structure more perfect. The issuance amount was RMB 3bn (Tenor: 3 year; Coupon rate: 2.7%). 5
Growing offshore RMB pools generates more demand Substantial RMB liquidity pool supports the financing activities for global institutes and corporate customers through bond issuances Currently, the RMB liquidity pool in Hong Kong accounts for more than half of the entire offshore pool Other financial centres are emerging in RMB business, investors in the respective regions show more interest in the RMB-denominated investment product Increasing demands on investment in offshore RMB bonds 1000 900 800 700 600 500 400 300 200 100 0 Hong Kong RMB Customer Deposits Source: HKMA (RMB billion) Sep2014 944.5bn J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S 2008 2009 2010 2011 2012 2013 2014 (RMB bn) HK Taiwan Singapore Macau Korea London Paris Luxembourg Record date 2014.09 2014.09 2014.06 2014.7 2014.7 2013.12 2013.12 2013.12 RMB deposit* 945 300 254 124 99 5.5 20 2.4 YTD +9.8% +64.5% +30.3% +44.3% N/A +7.6% N/A N/A *The RMB deposits are customer deposits (excluding interbank deposit) 6
Investor profile becomes more diversified At the early stage, the issuance of RMB bond market in Hong Kong was mainly targeting investors from Hong Kong and the rest of Asia. As more and more EU/US organizations get involved in bond issuance, the investors origins become more diversified. British Columbia in Canada: Mainly targeting North American investors UK Government: Asian investors account for 57%, and the EU investors account for 43%. IFC: US and non-asian investors account for 54%. 31% from central banks around the world. Investors of offshore RMB bonds breakdown 2010-2014 Source: BOCI Overall investor profile of all the offshore RMB bonds issued since 1 Jan 2010 to 28 Mar 2014 7
Offshore RMB bond market will take time to mature The overall depth and sophistication is still in a very primitive state compared with other developed bond markets Although the offshore RMB bond market has been progressing encouragingly, it still has a long way to grow Market size is still small US international bonds (offshore bonds): USD 3 trillion UK international bonds (offshore bonds): USD 2.9 trillion Offshore RMB bond: USD 70 billion Source: BIS (June 2014) Secondary market is not active According to SWIFT, turnover in value of offshore RMB bond in September 2014 is USD 84 billion (daily average is less than USD 3 billion), ranked No. 19 among all currencies. In the same month, the Euro and the US dollar bond trading reached USD 54 trillion and 22 trillion respectively (daily average turnover of USD 2.5 trillion and USD 1 trillion). 8
Outlook of the offshore RMB bond market The market will continue to grow and mature In 2014, Total issuance amount will be probably more than RMB 200billion (>80% YoY growth) There will be more sovereign bond issuance in the Hong Kong market in the next few years The successful issuance of RMB sovereign bonds from the World Bank and the British government will play a showcase effect. More new investors like central bank, sovereign fund, insurance company, asset managers are pouring into this market to find relative value. 9
Offshore RMB Market Update A. Offshore RMB Bond Market Update B. RMB Internationalization Process 10
From the perspective of Currency Functions RMB has been making a significant progress in the three basic currency functions, including payment, investment and reserve. Currency Functions 1. Payment Medium of exchange RMB has been widely accepted around the world 2. Investment Unit of account As a getting more popular investment tool, RMB investment is expanding rapidly. 3. Reserve Store of value RMB is rising to the status of being an alternative reserve currency for central banks. 11
The Growing Cross-border RMB Trade Settlement The majority of cross-border RMB trade settlement was settled via banks in Hong Kong. Currency Functions 1. Payment Medium of exchange World payments currency ranking & market share According to SWIFT, RMB ranked no.7 as worldwide payment currency In first 3 quarter, the volume of cross-border RMB trade settlement was 4.82 trillion, a YoY growth of 53% RMB Cross-border merchandise trade settlement (RMB billion), 2935 2081 506 3.6 4630 4820 Cross-border RMB trade settlement has reached 220 countries /regions or 98% countries /regions around the globe 2009 2010 2011 2012 2013 2014.1-9 Source: People s Bank of China 12
RMB RTGS volume reached a record high The financial infrastructure in Hong Kong plays an essential role in facilitating RMB cross-border and offshore transactions Currency Functions 1. Payment Medium of exchange 16 14 12 10 8 6 4 2 0.55 Hong Kong RMB RTGS Volume (RMB trillion) Oct 2014: 14 trillion Jan-Oct 2014: 136 trillion 2.69 4.56 6.56 11.33 0 01/11 07/11 01/12 07/12 01/13 07/13 01/14 07/14 14.11 Source: Hong Kong Interbank Clearing Ltd The RMB clearing bank in HK provides reliable and efficient RMB clearing services to financial institutions all over the world. As of Oct 2014, there are 225 banks participating in the RMB clearing platform in HK (76 of which are from other overseas regions). The clearing network covers around 30 countries in six continents. Recently, Hong Kong s RMB Clearing Bank has further extended the service hours to the world longest 20.5 hours per day, to better cater the growing business needs in Europe and America. 13
Lifted channels for investment in RMB denominated products With the development of RMB as a payment currency, there are increasing demands of investing in RMB. Currency Functions 2. Investment Unit of account Chinese government introduced different policies under capital account to facilitate the RMB funds flowing into and out of the Mainland China in an orderly and controlled manner. Allow designated institutions (including overseas central banks, RMB clearing banks participating banks) to invest into China s Inter-bank bond market using RMB, Use of RMB in ODI and FDI. In the first 3 quarters in 2014, cross-border direct investment in RMB recorded at RMB 720.8 billion, an YoY growth of 117%, much faster than the growth rate of cross-border RMB trade, that is 53%. 14
Lifted channels for investment in RMB denominated products Foreign investors are gaining more access to China s capital market. RQFII is well received in the market Currency Functions 2. Investment Unit of account RQFII Quota Distribution RQFII Quota Distribution (RMB billion) (RMB billion) 50 50 30 80 80 80 50 50 80 80 Australia Canada Qatar Germany Korea France Singapore UK A licensed RQFII may raise RMB funds offshore and invest directly into securities markets in China through an approved investment quota. Starting from 2013, the RMB Qualified Foreign Institutional Investors (RQFII) scheme was expanded to other regions 270 270 270 20 2011 2012 2013 2014 Hong Kong Source: People s Bank of China, BOCHK As of end-oct 2014, the total amount quota granted to individual institutions was RMB 294 billion (Hong Kong: 270B; UK: 9.6B; Singapore: 8.8B; France: 6B) 15
RMB Qualified Domestic Institutional Investor (RQDII) The new announced policy can further promote RMB going global Currency Functions 2. Investment Unit of account In Nov 2014, PBoC issued a circular to allow Qualified investors in the mainland China to use RMB in overseas investment Mainland China Broaden the channels of two-way flow of funds in RMB RMB internationalization process will be further accelerated. RMB Overseas Investment in RMB products 16
Stock Connect Connecting opportunities from all over the world China opens door to its stock market through Hong Kong Currency Functions 2. Investment Unit of account Illustration of orderly flow of funds The Shanghai-Hong Kong Stock Connect - A mutual market access program, through which investors in Hong Kong/Overseas 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 HKMA introduces additional measures to enhance RMB liquidly in Hong Kong Reinforce Hong Kong s role as the premier offshore RMB center Source: Hong Kong Stock Exchange Enhanced cooperation with Shanghai Expanded investment channels available for offshore RMB funds Increased transaction volume in RMB related businesses, e.g. currency exchange 17
Lifting RMB conversion limit Removing obstacles in product innovation Increase flexibility in RMB investment leads to more demands to use RMB in wealth management and retirement Currency Functions 2. Investment Unit of account Removal of RMB 20000 conversion limit for Hong Kong residents Under the new arrangement, banks will square their positions arising from RMB conversions conducted with Hong Kong residents in the offshore market instead of the onshore market. Benefits: Provide convenience to trade Shanghai A-shares through the Stock Connect Facilitate the development of more diversified RMB products and RMB investment opportunities can be captured more easily Promote the use of RMB in wealth management. Removal of limit is instrumental to the further growth of the Hong Kong offshore RMB centre. 18
RMB s growing reputation among central banks Many central banks around the world have signed bilateral currency swap agreements with People s Bank of China. Currency Functions 3. Reserve Store of Value 3. Reserve Store of value Canada, 200bn Brazil, 190bn Iceland, 3.5bn Switzerland, 150bn Russia, 150bn Belarus, 20bn Mongolia, 10bn UK, 200bn Kazakhstan, 7bn ECB, 350bn Ukraine, 15bn Korea, 360bn Hungary, 10bn Albania Turkey, Uzbekistan, 0.7bn, 2bn 10bn Pakistan, 10bn Qatar, 35bn Hong Kong, 400bn UAE, 35bn Thailand, 70bn Sri Lanka, 10bn Singapore, 300bn Malaysia, 180bn Indonesia, 100bn Australia, 200bn Argentina, 70bn Source: PBoC, BOCHK New Zealand, 25bn Bilateral currency swap agreements: with 28 central banks, amounted to more than RMB 3,100 billion The swap agreements serve as a backstop RMB liquidity facilities in those countries or regions. 19
RMB becomes an alternative reserve currency for central banks Some central banks and sovereign wealth funds are diversifying their currency holdings into RMB Currency Functions 3. Reserve Store of value It is reported that at least 50 countries or regions central banks have added RMB into their reserve portfolio already made investment in RMB assets. Among them, 29 central banks or monetary authority announced that they have bought RMB bond or RMB assets with total amount of RMB140 billion (USD 20billion). Australia: Allocated 3% of its foreign exchange reserves to RMB. UK: Issued the first non-chinese offshore sovereign RMB bond to raise RMB fund for its reserve 20
HK has huge advantages in RMB business amid competitions New offshore RMB centers are emerging, and each has its own niche and strength. Nevertheless, HK will continue to be the most significant offshore RMB market Benefits to HK amid rapid growth of offshore RMB business in other overseas regions The offshore RMB pool and business volume will be further expanded, and thus the pie of overall RMB business will be enlarged. Competitions facilitate these offshore RMB centers to optimize their services and create more diversified innovative RMB products, supporting the overall growth of the offshore RMB business. Strengths of HK comparing to other offshore RMB markets First-mover advantage, has become the largest offshore RMB center in terms of scale, depth and breadth Robust and efficient financial infrastructure. More advanced in every business line, playing a vital role in the overall development process Rich and excellent talent pool, consisting of not only local professionals (in banking, accounting & legal fields), but also many cross-border talents and management people with good knowledge and network domestically and internationally. In future, Hong Kong can act as a hub to link all offshore RMB centers in different regions together and continue to be the testing field 21
Thank you! 22
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RMB liquidity facility provided by HKMA The provision of RMB liquidity facility is crucial in assisting banks in Hong Kong to manage the increasing RMB payment volume Starting from 10 Nov 2014, banks may initiate a repo transaction with the HKMA to obtain intraday RMB funds. The HKMA will charge a fee, based on the actual time of usage, with reference to the prevailing overnight interest rate. Tomorrow/1-Week (1-week funds available next day) Tomorrow/Next (1-day funds available next day) Overnight (1-day funds available same day) Intraday Tenor One week One day One day Intraday Interest rate By reference to prevailing market interest rates TMA overnight CNH HIBOR fixing plus 50 bps TMA overnight CNH HIBOR fixing as of 11:00 am Eligible collateral Exchange Fund Bills and Notes (EFBN) HKSAR Government bonds (HKGB) RMB denominated bonds issued in Hong Kong by the Ministry of Finance of the People s Republic of China (CMOF) RMB denominated bonds issued in Hong Kong by policy banks of the People s Republic of China, including Agricultural Development Bank of China, China Development Bank, and Export and Import Bank of China 25
CNH Primary Liquidity Providers (PLPs) The PLPs help make the CNH products in Hong Kong more liquid and make more use of Hong Kong to support their CNH business worldwide. With effect from 27 October 2014, seven banks have been designated by HKMA as Primary Liquidity Providers (PLPs) for offshore RMB market in Hong Kong The seven banks include BOC (Hong Kong), HSBC, SCB (Hong Kong), BNP Paribas, ICBC (Asia), CCB (Asia), Citibank N.A. These banks have pledged to expand their market-making activities in Hong Kong for various CNH instruments, and use the Hong Kong platform in promoting their global offshore RMB business. In return, the HKMA provides a dedicated repo facility of RMB2 billion to each of the PLPs so as to facilitate more efficient liquidity management when they carry out more marketmaking and other business activities in the CNH market The seven PLPs were selected through a competitive process among the 16 contributing banks for CNH HIBOR fixing, which are all active participants in the CNH market. 26