offshore rmb express - bank of china (hong kong) limited · 2020-03-06 · hong kong amounted to...

Offshore RMB

Express Issue 58‧

December 2018

Contents

Part 3

Part 4

Part 1

Special Topic

Chart Book

Market Review

Part 2 Policy and Peers Updates 4

6

1

Editors：

Annie Cheung

Tel ：+852 2826 6192

Email : [email protected]

Pandora Wang

Tel：+852 2826 6586

Email: [email protected]

Sharon Tsang

Tel ：+852 2826 6763

Email: [email protected]

10

Market Review

Offshore RMB Express 1

I. RMB exchange rate against the USD

stabilized

Given that China and the US have

reached consensus on economic and trade

issues, together with the expectations on

slowing Fed’s interest rate hike path, the

external pressures on RMB exchange rate

eased somewhat. On November 30, the

RMB’s central parity rate against the USD

closed at 6.9357, up by 289 pips compared

to 6.9646 by the end of October. RMB

exchange rate against USD has stabilized

since mid-November. As of November 30,

CNH closed at 6.9493, up by 0.3% MoM and

down by 6.7% YTD, meanwhile CNY closed

at 6.9590, up by 0.2% MoM and down by

7.0% YTD.

On November 30, the O/N, 1-week and

3-month CNH HIBOR rates were 1.80%,

3.07% and 4.23%, respectively.

II. Major RMB Indicators Remain

Stable

By the end of October, RMB deposits in

Hong Kong amounted to RMB 617.3 billion,

up by 2.8% MoM and 14.3% YoY. Meanwhile,

RMB loan outstanding in Hong Kong was

RMB 116.0 billion, down by 0.3% MoM and

29.0% YoY. The total remittance of RMB for

cross-border trade settlement was RMB

335.8 billion in October, down by 3.7% MoM,

up by 6.8% YoY. RTGS turnover was RMB

22.2 trillion in November, up by 15.5% MoM.

Major RMB business indicators in the offshore market remained stable in November. RMB

exchange rate against the USD stabilized. During the month, China- US interest rate spread

began to invert, hindering the RMB bond allocation by foreign institutions. On November 22,

the Ministry of Finance and the State Administration of Taxation jointly announced the tax

exemption for overseas institutions investing in the onshore bond market, which is expected to

attract more foreign investment. In November, the trading volumes of Bond Connect continued

to grow, and Bloomberg successfully became as the second electronic trading platform. In

addition, the People’s Bank of China (PBOC) has renewed a bilateral currency swap

agreement with its counterpart in Indonesia. Overall, the development of offshore RMB market

remained stable.

Steady Development of Offshore

RMB Market

Market Review

Offshore RMB Express ２

By the end of November, the issuance of

dim sum bond amounted to RMB 28.6

billion, up by 14.9% YoY. In October,

Swift showed that the RMB dropped one

position to the 6th place in the currency

rankings for international payments by

value, with a share of 1.70%. The

decline was due to seasonal effects

following the Golden Week holiday in

China during the month.

III. Foreign allocations to RMB bonds

slowed slightly

In October, foreign institutions

reduced their RMB bond holdings by

RMB 9.6 billion, ending the 19

consecutive months of net increase in

bond holdings since March 2017. In

November, the China-US interest rate

spread started to invert, foreign holdings

of RMB bonds continue to decrease.

According to CCDC data, foreign

institutions reduced their RMB bond

holdings by RMB 18.3 billion this month.

On November 22, taxation policy

was further clarified by the Ministry of

Finance and State Administration of

Taxation, setting out the temporary

exemption of corporate income tax and

value-added tax for interest income of

overseas institutions investing in the

onshore bond market from 7 November

2018 to 6 November 2021. In the long

run, the introduction of the new tax

exemptions is expected to serve as an

attractive incentive for foreign investors.

IV. Bond Connect saw another

breakthrough

Bloomberg joined the scheme as a

second e-trading platform on November

29, allowing Bond Connect investors to

send RFQ via multiple e-trading

platforms to trade with Bond Connect

market makers for their China interbank

bond market investments.

Market Review


In November, total trading volumes of

Bond Connect were RMB 74.3 billion 2018

with average daily turnover at RMB 3.38

billion and net purchase at RMB 8.7 billion.

During the month, Bond Connect attracted

the first investors from Austria and Denmark,

expanding its coverage to 23 jurisdictions

and 467 international institutional investors

across the globe. Among all accounts, 64%

were opened by global asset managers and

fund managers in the form of various

investment products. The scheme has

already attracted 36 out of the global top 100

asset managers.

V. Steady progress of opening-up in

domestic capital markets

According to statistics from the State

Administration of Foreign Exchange, by the

end of November, the approved quota for

Renminbi Qualified Foreign Institutional

Investor (RQFII) was RMB 642.7 billion;

remained unchanged from the previous

month, while the approved quota for

Qualified Foreign Institutional Investors (QFII)

increased by 300 million to RMB 100.5 billion.

The approved quota for Qualified Domestic

Institutional Investors (QDII) totaled USD

103.2 billion, with a total of 152 qualified

domestic institutional investors approved, the

same as the previous month.

In November, the PBOC has renewed a

bilateral currency swap agreement with its

counterpart in Indonesia. The move is aimed

at facilitating bilateral trade and investment,

and maintaining financial market stability.

The agreement will allow the two sides to

swap a total of RMB 200 billion / IDR 440

trillion. The agreement will be valid for three

years and can be extended by mutual

consent. By 3Q 2018, under all the bilateral

currency swap agreements signed by the

PBOC and overseas monetary authorities,

overseas monetary authorities have used up

to RMB 32.48 billion, while the PBOC has

used the equivalent of USD 892 million.

Policy and Peers Updates


BOC supports the development of RMB

business in the Philippines On November 20, Bank of China (BOC) and the Philippines’ Department of Finance

signed the Memorandum of Understanding that they will continue to co-operate the

issuance of new sovereign panda bonds for the Philippines. In March this year, BOC,

acting as the lead underwriter and book runner of the issuance, assisted the Philippines

to issue RMB 1.46 billion worth of yuan-denominated bonds in China’s interbank bond

market. In addition, BOC accepted the license from the Central bank of the Philippines to

initiate RMB/PHP direct trade market. BOC Manila Branch completed the first deal on the

platform.

PBOC issued sovereign bills in Hong Kong

On November 7, the People’s Bank of China (PBOC) issued RMB bills through the

Central Moneymarkets Unit of the Hong Kong Monetary Authority. The issuance

contained RMB 10 billion 3-month bills and RMB 10 billion 1-year bills priced at 3.79%

and 4.20%, respectively.

China announced a three-year tax exemption on bond interest for overseas

investors

China’s Ministry of Finance and the State Administration of Taxation jointly announced

that overseas institutional investors would be exempted from corporate income tax and

value added tax on interest income derived from investment in onshore bond market. The

tax exemption would be effective from November 7, 2018 to November 6, 2021. However,

the tax exemption would not be eligible for institutions setting up by overseas institutions

in onshore market.

Special Topic


Weibo XIONG, Strategic Planner

Ting Shu CHANG, Management Trainee

1. The latest progress and

implications of RMB

internationalization in the Philippines

On November 20, 2018, President Xi

Jinping made a state visit to the Philippines.

President Xi and Philippine President,

Rodrigo Duterte, witnessed the signing of

multiple bilateral collaboration documents,

including the Memorandum of Understanding

(MoU) on RMB Clearing Arrangements and

the Letter of No Objection issued by

Philippine Association of Forex Traders Inc.

Besides, Bank of China (BOC) and the

Philippines’ Department of Finance signed

the MoU on further co-operation in the

issuance of new sovereign panda bonds for

the Philippines. In March this year, BOC,

acting as the lead underwriter and book

runner of the issuance, assisted the

Philippines to issue RMB 1.46 billion worth of

yuan-denominated bonds in China’s

interbank bond market. It was the first

sovereign panda bonds issued by the

Philippines and the first by an ASEAN

member state.

The RMB/PHP direct trade market was

officially launched on November 20. On that

day, BOC Manila Branch completed the first

deal on the platform. Earlier on October 30,

the Philippine Renminbi Trading Community

(PRTC) was initiated and chaired by BOC

Manila Branch, with 13 major banks

The Implications and Prospects

for RMB Internationalization in

the Philippines

RMB business in the Philippines has achieved important development recently, which is having

significant implications for promoting RMB internationalization locally and throughout the ASEAN

region. At present, there is a remarkable progress in the use of RMB in the Philippines for

transaction, clearing, investment and financing, and also as being a reserve currency. Against the

backdrop of the Belt and Road Initiative and the development of comprehensive strategic

partnership between China and the Philippines, the prospects for RMB business in the Philippines

will continue to be promising.

Special Topic


joining as founding members. The PRTC is

the first offshore self-regulating financial

organization for overseeing transactions

between the RMB and the PHP. It is

responsible for the organization and

operations of local trading between the RMB

and the PHP, as well as setting rules for

transactions and clearing.

At present, there is a remarkable

progress in the use of RMB in the Philippines

for transaction, clearing, investment and

financing, and also as being a reserve

currency. The Philippines has already started

RMB businesses, such as RMB deposits etc.,

as early as the beginning of the 21st century.

In some ten years, RMB internationalization

in the Philippines has progressed rapidly in

an orderly manner. The RMB’s functions

have gradually transferred from solely as a

trade settlement currency towards more

advanced developments in clearing,

investment and financing, and also as a

reserve currency. It could be conducive to

enhance the demand for RMB usage by

utilizing the currency for transaction and

pricing in trade, optimizing payment and

investment procedures, as well as reducing

transaction costs and foreign exchange risk,

proactively underpinning RMB

internationalization.

2. Promising prospects for RMB

internationalization in the Philippines

Given the development of

comprehensive strategic partnership

between China and the Philippines with

flourishing bilateral economic and investment

activities, the prospects for RMB

internationalization in the Philippines will

continue to be promising.

Firstly, the RMB could play a more

important role in Sino-Philippine trade

settlement given China’s development

edge. The importance of China to the

Philippines keeps increasing as China

becomes the fourth largest export market for

the country while it is the largest source of

imports. Between 2012 and 2017, the

proportion of Chinese imports climbed from

11% to 18%. Nevertheless, the usage of

RMB in bilateral trade settlement only

accounted for 2%. With the facilitation of

cross-border RMB transactions in the

Philippines, economic activities between the

two nations will have a higher incentive to

use the RMB for settlement. Thus, there will

be huge potential for RMB settlement growth.

Secondly, the importance and

convenience of the RMB in the

Philippines as a medium for investment

and financing continue to increase. First

of all, the Belt and Road Initiative and

comprehensive strategic partnership

between China and the Philippines will bring

Special Topic


more bilateral investment projects between

the two nations, which will boost the

accumulation of RMB funds locally. Next, in

January 2018, the People's Bank of China

(PBOC) defined measures to facilitate direct

investment in RMB by foreign investors, and

funds raised by enterprises through issuing

shares and bonds offshore for domestic use,

facilitating RMB usage in investment. In

addition, the PBOC and the Ministry of

Finance issued interim management

measures for the issuance of bonds by

overseas institutions in the interbank bond

market, improving the arrangement for

issuing bonds. Given the successful

issuance of panda bonds and the singing of

the MoU this year, the financing function of

the RMB in the Philippines has been

strengthened, which is conducive to enhance

investors’ willingness to hold RMB assets.

Thirdly, the potential for exchange

rate appreciation will increase demand for

investment and reserves in the RMB.

Statistics from the Bank for International

Settlements showed that the nominal

effective exchange rate of the RMB

increased by 86% from 65.9 in 1994 to 122.5

in September 2018. From the perspective of

purchasing power parity, market exchange

rate of the RMB against the USD was still

underestimated by 12% in September 2018.

Therefore, the potential for RMB appreciation

will benefit asset holders and strengthen their

willingness to hold RMB assets.

Fourthly, market confidence in the

RMB is supported by the currency’s

status as foreign reserves assets in the

Philippines, legal protection and official

endorsement. In 2016, the Philippines

incorporated the RMB into its foreign

reserves. During the year, the International

Monetary Fund included the RMB in the

Special Drawing Right currency basket.

Subsequently, over 60 central banks or

monetary authorities have included the RMB

in their foreign reserves. As of the first half of

2018, RMB assets held by foreign reserves

globally amounted to USD 193.4 billion,

surpassing AUD assets for the first time. The

proportion of RMB assets in total foreign

reserves climbed to 1.8% from 1.1% at the

end of 2017. Although the Philippines does

not disclose the share of RMB assets in its

foreign reserves, the proportion has possibly

increased over the past two years, judging by

the Philippines' recognition on the RMB. The

role of RMB as a reserve currency has

strengthened accordingly.

Special Topic


Fifthly, the Philippines’ welcome

attitude towards the RMB could be

conducive to the development of RMB

market and its usage. In recent years,

Philippine government and other institutions

have clearly recognized the benefits of

developing RMB business, and issued panda

bonds. President Xi’s state visit on

November 20 and the development of Sino-

Philippine comprehensive strategic

partnership will enable the Philippines to

further support RMB internationalization.

Sixthly, the development of

systematic arrangement for RMB

business in the Philippines, such as

clearing and transaction, etc., is still

carrying out. There will be huge room for

RMB internationalization to advance further.

For the time being, the PBOC and the

Central Bank of the Philippines have yet to

authorize any RMB Clearing Bank and sign

bilateral currency swap agreement. The

negotiation for bilateral currency swap

agreement was scheduled to commence in

2014, but it was finally shelved due to

geopolitical tensions. If the agreement

resumes in the future, it will stabilize the

funding price and liquidity of the RMB locally

and enhance market willingness to use the

RMB. Also, the Chiang Mai Initiative

Multilateralization Agreement between the

Philippines and other ASEAN countries,

Japan, China and South Korea will have

positive impacts on RMB usage throughout

the Asia-Pacific region.

Chart Book


Market Indicators

Hong Kong RMB Deposits (in RMB bn) RMB Cross-border Trade Settlement (RMB bn)

USD-CNH and USD-CNY Exchange Rates

Source: HKMA Source: HKMA

Source: Bloomberg

Chart Book


CNH HIBOR Fixing (%) Hong Kong Offshore RMB Bond Issuance (RMB bn)

CNH & CNY China Sovereign Curve (%, 30 Nov 2018)

FTSE-BOCHK Offshore RMB Bond Composite Index

Source: Bloomberg

Source: Bloomberg Source: Bloomberg

Source: BOCHK Global Market estimate

End of Nov:

End of Nov:

Chart Book

Offshore RMB Express

October 2016 October 2018

40.55% USD #1

EUR 32.26% #2

GBP 7.61% #3

JPY 3.38% #4

1.97% CAD

EUR 34.24% #2

GBP 7.28% #3

JPY 3.65% #4

#5 1.82% #5 CAD

CNY #6 1.67%

USD #1 39.71%

1.70% #6

AUD

CNY

#7 1.48%

HKD #8 1.35%

12

RMB Clearing Transaction Value (RMB tn)

SWIFT World payments currency ranking & market share

Source: HKICL

Source: SWIFT

Disclaimer: This report is for reference and information purposes only. It does not

reflect the views of Bank of China (Hong Kong) or constitute any investment advice.

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offshore rmb express - bank of china (hong kong) limited · 2020-03-06 · hong kong amounted to...

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