DBS RMB Index for VVinning Enterprises (DRIVE) - 2Q13

DBS RMB Index for VVinning Enterprises (DRIVE) - 2Q13 DBS Group Research 16 August 2013 Chris Leung (852) 3668 5694 chrisleung@dbs.com Nathan Chow (852) 3668 5693 nathanchow@dbs.com Lily Lo (852) 3668 5695 lilylo@dbs.com Unless stated otherwise, figures in parentheses represent findings in 1Q13 In 2Q13, many milestones in RMB internationalisation were achieved. Singapore became the third offshore RMB centre after Hong Kong and Taiwan, and Beijing signed a three-year currency swap with London. While the use of RMB has clearly expanded to regions like ASEAN and Europe, there is still ample room to deepen RMB penetration locally. In Hong Kong, the popularity of using RMB for trade settlement, financing, and day-to-day business transactions is still low relative to the HKD and the USD. The 2Q13 reading of DRIVE is 55.2, compared to 55.1 in 1Q13 and 54.9 in 4Q12. The marginal increase of the index reflects a less pessimistic outlook of business performance in the future and the fact that fewer companies reported a decline in business performance in the past 12 months. Although the survey results showed a decrease in the usage of RMB for payments and receivables, more current users indicated an increase in RMB customer orders/ invoices and trade settlement in the past 12 months, resulting in the higher reading of DRIVE. Although the business performance outlook is less pessimistic than before, the reality is that companies are still very cautious about the business and economic outlook. Over half of the respondents expect Hong Kong s general business environment to deteriorate over the next 12 months. More than half expect their business performance to stagnate. The cautious outlook and lower expectations of RMB appreciation (Charts 1 & 2) may have affected companies appetite to use RMB. In 2Q13, the percentage of companies surveyed that used RMB products dropped significantly. Only 14% used any RMB products in 2Q compared to 26% in 1Q. Of those companies that used any RMB products, 32% (40%) used FX spot and 23% (28%) had savings/cheque accounts. However, with the introduction of more RMB products, the usage of the currency has expanded to more complex product types like structured investment deposits. But there is still much room to grow the use of RMB hedging products. Only 1% of companies surveyed are currently using RMB hedging products, and only 2% are not currently using such products but will consider doing so in the next 12 months. In the RMB financing space, interest is still very limited. Only 1% of companies surveyed indicated they had used RMB financing, and only 2% indicated that they are likely to get RMB financing in the next 12 months. Of those respondents that are unlikely to apply for RMB financing in the next 12 months, more than 90% said they had no need for such loans, while only 3% cited concerns about the interest rate. RMB internationalisation is still in its infancy The index results reflect the fact that RMB internationalisation is still in its infancy. The RMB is now ranked No.11 with a tiny share of 0.87% as a global payment currency, according to SWIFT. This contrasts sharply with the 36.6% and 36.4% share of the euro and USD respectively, the two most-used currencies for global transactions. While it is widely believed that RMB appreciation will aid its internationalisation at the macroeconomic level, appreciation alone does not guarantee faster progress. Continuous policy support from Beijing is crucial. 1

Recently, mainland authorities announced a series of measures aimed at simplifying RMB cross-border transactions. In particular, banks on the mainland can now process RMB cross-border trade settlement for their corporate clients before verifying documentary proof of underlying trade transactions, based on the basis of know your customer, know your business, and due diligence. The streamlined process increases efficiency in handling RMB-denominated trades. This should, in turn, increase the adoption of the RMB for cross-border trade transactions. Currency appreciation or depreciation might be less relevant from a supply chain perspective. Cost advantage is also a key driver that fuels the growth of RMB-settled trade. For corporations that trade with China, the use of RMB can lower their FX costs and risks. They can also enjoy price discounts offered by some Chinese companies. Given the favourable regulatory support, offshore corporations are seeing a greater ability to manage their RMB exposure using different investment tools. This shows that efforts to develop RMB products and infrastructure can continue even as appreciation expectations moderate. Key findings and DBS insights 1. RMB usage has declined In 2Q13, only 14% of companies surveyed used any RMB products, compared to 26% in 1Q13 (Chart 3) Business needs for RMB decreased recently and are expected to decrease in the next 12 months. 42% (44%) of companies surveyed indicated that they had RMB customer orders/invoices in the last 12 months, and 49% (51%) claimed that they would be using RMB for these purposes in the next 12 months 2% (2%) of companies that used trade services (all currencies) had used RMB trade services in the past 12 months while 3% (3%) that used trade services (all currencies) but are not currently using RMB trade services will consider using them in the next 12 months (Chart 4a) 1 (22%) of companies surveyed are currently using or will consider using RMB payments and receivables in the next 12 months (Chart 4b) The usage of RMB is already quite common among large corporations (turnover over HK$1billion). 100% (90%) of the large corporations surveyed indicated that they had RMB customer orders/invoices in the last 12 months DBS insights RMB usage levels may have been affected by lower RMB appreciation expectations and a cautious business outlook. In 2Q13, fewer respondents reckoned that RMB will appreciate against the USD in the next 12 months (48% in 2Q13 vs. 54% in 4Q12), while more expected RMB will depreciate ( in 2Q13 vs. 4% in 4Q12) (Chart 2) 2. The scope of RMB products used has increased Of those companies that used any RMB products, 32% (40%) used FX spot and 23% (28%) had savings/cheque accounts (Chart 5) Of those companies that used any RMB products, 22% (4%) used RMB-denominated structured investment deposits (SIDs), while 14% (3%) used structured investment deposits denominated in other currencies but linked to RMB (Chart 5) Hedging products are not very popular. Only 1% of companies surveyed are currently using RMB hedging products, and only 2% are not currently using them but will consider doing so in the next 12 months 2

DBS insights Given favourable regulatory support, offshore corporations are seeing a greater ability to manage their RMB exposure using different investment tools. In particular, the Treasury Markets Association recently launched CNH HIBOR fixing. This provides a reliable benchmark to price loan facilities and facilitates the development of the offshore RMB interest rate swap market. That explains the increase in the number of companies using complex products in 2Q13, even though RMB usage for business operations generally declined in the last quarter. This shows that efforts to develop RMB products and infrastructure can continue even as currency appreciation expectations moderate. The development of RMB for use in business transactions and in investment products may not go hand in hand. 3. HKD and USD are still the preferred currencies for payment and receivables/trade settlement (10%) of respondents converted RMB or used spot RMB in the past 12 months 3% (7%) of respondents had used RMB savings and cheque accounts in the past 12 months 43% (49%) of respondents held RMB as part of their liquid assets in the past 12 months 2% (2%) of companies that used payment and receivable/ trade services (all currencies) preferred to use RMB for payment and receivables/trade settlement (Chart 6) Of the companies that used payment and receivable/trade services, 72% (73%) preferred to use HKD while 22% (22%) preferred to use USD for payment or trade settlement (Chart 6) DBS insights HKD remains the predominant currency used by companies for payment and commercial transactions. The use of RMB in Hong Kong is not expected to lead to the substitution or marginalisation of the HKD. Local companies preference to use RMB may be affected by their trading partners willingness to accept/make payments in RMB. To take local RMB usage to a higher level, it is imperative that Hong Kong s trading partners prefer to use RMB. This is because many overseas buyers determine the currency used for trade settlement, and USD is still their preferred choice. Even if certain exporting companies in Hong Kong prefer to accept RMB an appreciating currency the counterparty may not want to pay in RMB. In that sense, the government s strategy to promote RMB usage in nearby Asian economies is in the right direction. 4. Need for RMB financing is generally lacking Only 1% (1%) of respondents are currently using RMB financing 81% (8) of respondents said they are quite unlikely or very unlikely to apply for RMB financing in the next 12 months, 72% of which said their company does not need RMB/mainly use other currencies (Chart 7) 48% (61%) of respondents do not know if the availability of RMB financing products in the market is sufficient, suggesting knowledge in this space is particularly weak, but this is improving 3

DBS insights These findings reflect that the RMB loan business of banks in Hong Kong has been lagging behind other areas of RMB offshore development. RMB loans outstanding totaled RMB 88.2 billion as of April 2013 [1], compared with a total of RMB 300 billion dim sum bonds outstanding as of July 2013. Demand for offshore RMB financing activities is expected to become more robust going forward, given the relaxation of RMB lending restrictions and the increasing scale of cross-border lending activities. 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 are widely available, they are not able to offer an in-depth perspective on the developmental progress of Hong Kong as an RMB offshore 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 has commissioned an independent research house (Nielsen) to compile DRIVE and conduct the related survey on a quarterly basis, starting from the fourth quarter of 2012. 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 from 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$200,000 and above were interviewed by telephone. A total of 213 companies were surveyed between May and June 2013. The sample comprised 203 SMEs (with annual sales turnover of HK$200,000 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). Table 1: Company industry coverage Manufacturing Construction Wholesale Retailing Import/ Export Restaurants Hotel/ Real Estate Transportation/ Communication Business Services Personal Services 4

Table 2: Company annual sales turnover (source: C&SD 2011) Over HK$1 Billion 0.3% Over HK$50 Million to HK$1 Billion 4.1% Over HK$20 Million to HK$50 Million 5.4% Over HK$10 Million to HK$20 Million 4.1% Over HK$1 Million to HK$10 Million 47.0% Over HK$ 200,000 to HK$1 Million 39.1% 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 internationalisation of RMB in Hong Kong. They are: 1) Actual business performance in the last 12 months and expectations for the next 12 months as the underlying conditions driving corporate demand for RMB; (2) Past and future demand for RMB in business operations; (3) Usage of RMB for trade services and payment receivables; 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) = 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] HKMA [2] Factor analysis is a statistical treatment to provide approximation to describe the variability of the parameters used to calculate the index 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 www.nielsen.com. 5

Key charts and graphs Chart 1: Business performance in the past and next 12 months Increased by over 10% 3% Change in P12M Expected change in N12M Increased by -10% 18% 14% No change (+/-) 49% 59% Slowed down by -10% Slowed down by over 10% 12% 12% 13% 9% Don't know/not sure 3% 2% Chart 2: Expectations on RMB appreciation Chart 3: Usage of RMB products 6% 42% 1 39% Appreciate over Appreciate 2- Used any RMB products, 14% 26% 1% 24% 4% 0% 20% 17% 2Q13 4Q12 No change (+/- 2%) Depreciate 2- Depreciate over Don't know/ Not sure Have not used any RMB products, 86% Chart 4a: Usage of RMB trade services Not having the need 91% Don't Using know/not 2% sure 4% Not using but will consider in next 12 months 3% Chart 4b: Usage of RMB payment and receivables Not having the need 81% UsingDon't 10% know/not sure 4% Not using but will consider in next 12 months 6

Chart 5: RMB products used FX Spot RMB saving and cheque acct RMB denominated SIDs 23 22 32 Chart 6: Preferred currency for settlement USD 22% Euro/GBP 1% Don't know/no preference 3% Other currency linked to RMB SIDs Deliverable forward RMB letter of credit 6 12 14 RMB 2% HKD 72% RMB term loan 4 Base: Companies using any RMB product (n=54) Weighting adjustment explains difference in main text and chart Base: Companies which used payment and receivables/trade services (n=162) Chart 7: Likelihood of getting RMB financing in the next 12 months Very Likely Quite Likely 1% 1% Neither Likely Nor Unlikely 12% Quite Unlikely 2 Very Unlikely 56% Don't know/ not sure 7

Recent Research CN: A blueprint for expanding RMB usage 7 Aug 13 Asia: new drivers, new risks the impact of a slower China on regional economies and currencies 2 Aug 13 CNH: Key messages from the Sino-US Dialogue 30 Jul 13 CNH: PBoC relaxes rules for RMB crossborder activities 12 Jul 13 TW: Less vulnerable than most 9 Jul 13 US Fed: Three up, three down 8 Jul 13 Asia cyclical dashboard: grinding it out 3 Jul 13 IN: Fretting over Fed QE 28 Jun 13 US Fed: too hot to trot? 24 Jun 13 VN: At easing s end 21 Jun 13 TH, ID, PH: Roadmap to 2020 18 Jun 13 Qtrly: Economics-Markets-Strategy 3Q13 13 Jun 13 Asia property: How high the moon? 4 Jun 13 CN: Sino-South Korean economic relationship 29 May 13 CNH: Qianhai to offer CNH trust products 16 May 13 KR&TW: Examining the yen s impact 7 May 13 CN: Sino-Australian relationship reaching new highs 29 Apr 13 PH: Harnessing liquidity 3 Apr 13 US Treasuries: Expensive 1 Apr 13 TW: Is Taiwan exiting China 27 Mar 13 CNH: RQFII will not deplete offshore liquidity 21 Mar 13 Qtrly: Economics-Markets-Strategy 2Q13 24 Mar 13 CN: A global RMB: Inventing the necessary 11 Mar 13 CN: Interest rates must rise 8 Mar 13 IN: Pragmatic budget, tough to meet 1 Mar 13 TH: Keeping an eye on excesses 27 Feb 13 SG budget: Another push on restructuring 26 Feb 13 CN: The new push for urbanization 22 Feb 13 CNH: Singapore and Taiwan style SG Budget: focussing on the longer-term Asia: cyclical dashboard 19Feb13 18Feb13 14Feb13 IN: Exception to the rule 6 Feb 13 CNH: Eclipsing the NDF market 4 Feb 13 JP: USD/JPY to go triple-digit 31 Jan 13 Asia: Weaker JPY does not imply weaker AXJ 30 Jan 13 US unemployment: Which trend is your friend? 29 Jan 13 JP: Abenomics - one achievement, three challenges 17 Apr 13 CN: Deepening economic ties with Russia 9 Apr 13 Sing-Iskandar: Creating synergies 8 Apr 13 SGD: A fine balancing act 5 Apr 13 ID: Fuel price pressures Asia: towards a better 2013 SG: Lowering property market risk KR/TW: Is yen depreciation a big worry? 23 Jan13 18Jan13 18Jan13 18Jan13 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. 8